A trader works on the floor of the New York Stock Exchange (NYSE) on January 12, 2015 in New York City. Forecasts for first-quarter profits in the Standard & Poor’s 500 index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg.Spencer Platt/Getty Images
While stock investors wait for the benefits of cheaper oil to seep into the economy, all they can see lately is downside.
Forecasts for first-quarter profits in the Standard & Poor's 500 index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg. Reductions spread across nine of 10 industry groups and energy companies saw the biggest cut.
Earnings pessimism is growing just as the best three-year rally since the technology boom pushed equity valuations to the highest level since 2010. At the same time, volatility has surged in the American stock market as oil's 55-per-cent drop since June to below $49 (U.S.) a barrel raises speculation that companies will cancel investment and credit markets and banks will suffer from debt defaults.
"Either there is nothing to worry about and crude is going quickly back to $70 plus, or we have entered an earnings down cycle for an appreciable portion of the market," said Michael Shaoul, who helps oversee $10-billion as chief executive officer of Marketfield Asset Management in New York.
U.S. companies are facing the weakest back-to-back quarterly earnings expansions since 2009 as energy wipes out more than half the growth and the benefit to retailers and shippers fails to catch up. Oil producers face a combination of faltering demand and booming supplies from North American shale fields, with crude sinking to $48.36 a barrel from an average $98.61 in the first three months of 2014.
Profit is forecast to have grown 2 per cent in the final three months of 2014 and increase 2.8 per cent for the current quarter, down from analysts' October estimates of 8.1 per cent and 9.2 per cent, respectively.
Except for utilities, every other industry has seen reductions in estimates.
ConocoPhillips Co., based in Houston, and Continental Resources Inc. from Oklahoma City are among energy producers that reduced their 2015 spending plans in December. The industry accounts for a third of all capital spending in the S&P 500, according to Deutsche Bank AG.
U.S. oil drillers laid down 61 rigs last week, the most since February, 1991, Baker Hughes Inc. data show. Contract drillers Helmerich & Payne Inc. and Pioneer Energy Services Corp. both said this month that they've had clients pay early-termination fees to end agreements for rigs.
The drag is spreading to other industries. U.S. Steel Corp., the country's second-biggest producer of the metal, said last week that it plans to lay off more than 750 employees at two pipe plants to cope with lower investments.
Daily swings in the S&P 500 have been almost 50 per cent higher since OPEC declined to trim output to ease a global oil-supply glut. The index has moved 0.76 per cent daily since the Nov. 27 announcement, up from the 0.51-per-cent fluctuations in 2014 up until that point.