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Analysis: High energy prices may sink US stocks during the earnings season

New York, June 23 (Reuters) – Soaring oil prices are another barrier to US corporate earnings, and some on Wall Street fear that this could plunge stock prices further red.

Brent crude oil has risen nearly 40% since the beginning of the year, and tight inventory, rising demand and the war in Ukraine have kept prices at their highest level since 2014, at $ 110.73 per barrel.

Large retailers Target Corp. (TGT.N) and Walmart Inc (WMT.N) have already warned that oil prices are cutting in their bottom lines. Some investors worry that the impact of oil prices may not yet be fully reflected in other companies ‘earnings analysts’ estimates and may give the stock another blow if those estimates start to fall. Read More

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“On the surface, earnings are strong, but rising energy prices are likely to start cutting margins by 2022,” said Jason Pride, chief investment officer at Private Wealth at Glenmead.

According to the S&P Dow Jones indices, the S&P 500 is down 21.1% year-over-year, the worst half of any year since 1932, as the Fed tightens monetary policy in the fight against the worst inflation in decades.

Overall, according to Ned Davis Research, every $ 10 increase in oil prices cuts 0.3% of global gross domestic product. An increase of about $ 30 in oil prices since February has shaved 1% of the global economy, LaForge estimates, this year as the United States is on the path of recession.

“There’s no way to avoid it,” said John LaForge, head of real property strategy at Wells Fargo Investment Institute. “When commodities perform well, you always find stocks stuck in the bear market because they squeeze their margins.”

Last month, Walmart said fuel costs were $ 160 million higher than expected, but Target said it was adding $ 1 billion to its forecast for transportation and freight costs for the full year. Read More

Still, there are some signs that analysts are adding to rising fuel costs estimates. According to refintiv data, approximately 61% of second-quarter earnings results have been negative so far with corporate pre-announcements, well above the 68.7% rate of negative pre-announcements in the previous quarter. Most S&P 500 companies report second-quarter earnings after mid-July.

Overall, the S&P 500 is expected to post earnings growth of 5.4% in the second quarter, according to Refinitiv. Once energy companies take over, it drops to 2.2%.

Investors are expecting oil prices to remain high. Bullish positions in oil and other commodities are the most popular business among global investors, according to a survey by BofA Global Research.

An Reuters poll showed analysts expect crude oil prices to average $ 99.52 per barrel and $ 91.59 per barrel by 2023. / CEPOLL Over the past 10 years, oil prices have increased by more than $ 90 per barrel in the last 22 months, according to Refinitive Data, mainly in the range between $ 40 and $ 80.

Analysts at BlackRock warned that consensus earnings estimates do not reflect the possibility that energy prices will hit growth. That’s one reason “we don’t see risky asset retreat to buy declines – and expect more volatility ahead,” he wrote this week.

Typically, high oil prices can slow the economy and ultimately reduce demand, either through recessions or changes in consumer spending patterns. BofA Europe Commodities Technician Francisco Blanch said Russia would be less likely at this time if it continues to face energy constraints for the foreseeable future.

“Even if the world goes into recession, we estimate that Brent will average more than $ 75 / bbl in 2023,” he said.

Investors are focusing on the Fed’s aggressive response to inflation as this year’s slump in the S&P 500 so far has reduced valuations rather than declining estimates, said Natexis Investment Managers Solutions Portfolio Strategist Garrett Melson.

He said increased oil prices would soon cut overall earnings, eventually adding to the appeal of large technology companies that did not rely on broader economic benefits, such as Google-backed Alphabet.

“There is a real risk of margin compression and there is further downside,” he said.

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Report by David Randall; Edited by David Gregorio

Our Standards: Thomson Reuters Trust Principles.

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