US bear mar­ket and oil sup­ply glut dampen in­vestor spirit

The Star Early Edition - - BUSINESS REPORT - Caro­line Valetkevitch and Ro­drigo Cam­pos

HEAD­ING into sec­ond-quar­ter earn­ings sea­son, in­vestors are look­ing for a con­tin­u­a­tion of strong US com­pany re­sults to jus­tify high stock val­u­a­tions, now trad­ing near their lofti­est lev­els since 2004. How­ever, drilling a hole into that hope­ful sce­nario is the cur­rent bear mar­ket in oil prices and an econ­omy show­ing signs of growth be­low the pace ex­pected ear­lier in the year.

“A lot of the ex­pec­ta­tion for a re­cov­ery in earn­ings is pred­i­cated on oil prices be­ing around $47 to $50 (R606 to R645) a bar­rel,” said Hugh Johnson, chief in­vest­ment of­fi­cer of Hugh Johnson Ad­vi­sors in Al­bany, New York. “So if you don’t get those num­bers, you don’t get the strong earn­ings the stock mar­ket needs. This is not triv­ial stuff. It cre­ates a lot of uncer­tainty and volatil­ity in fore­casts.”

US crude fu­tures CLc1 have been pres­sured lower by a sup­ply glut. They’ve av­er­aged above $48 per bar­rel so far this quar­ter, but traded around $43 on Fri­day and are down more than 20 per­cent from Fe­bru­ary, when they hit an 18-month high.

Bull run

US stocks are in the ninth year of a bull run which has been fu­elled of late by bets on pro-growth poli­cies from US Pres­i­dent Don­ald Trump. How­ever, with the timetable for re­forms stretch­ing fur­ther into the fu­ture, earn­ings are seen as a crit­i­cal sup­port for stock prices.

With in­dexes near record highs, there is spec­u­la­tion among Wall Street an­a­lysts about whether a correction is due. Earn­ings ex­pec­ta­tions have dropped for 10 of 11 in­dus­try groups since early April, with only in­dus­tri­als look­ing bet­ter than they did then.

The bench­mark S&P’s 500 stock in­dex as a whole is ex­pected to de­liver 7.9 per­cent profit growth, down from 15.3 per­cent in the first quar­ter, and be­low the 10.2 per­cent fore­cast in April, data shows. On Thurs­day, Nike will be the first Dow com­po­nent to re­port earn­ings for the most re­cent quar­ter. The sea­son heats up in the sec­ond week of July.

Tech­nol­ogy earn­ings are seen post­ing dou­ble-digit growth, helped by gains in semi­con­duc­tor com­pa­nies, and fi­nan­cials are close be­hind with es­ti­mated 8.1 per­cent profit growth.

While lower en­ergy prices can help some sec­tors such as in­dus­tri­als and trans­ports, as well as boost­ing con­sumer sen­ti­ment, high ex­pec­ta­tions for en­ergy earn­ings growth mean any stum­ble will be felt broadly. – Reuters

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