US bear market and oil supply glut dampen investor spirit

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