Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Wall St Week Ahead: Energy price spike adds market risk as earnings arrive

EconomyOct 08, 2021 22:40
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
© Reuters. FILE PHOTO: A street sign for Wall Street is seen outside of the New York Stock Exchange (NYSE) in New York City, New York, U.S., June 28, 2021. REUTERS/Andrew Kelly/File Photo

By Lewis Krauskopf

NEW YORK (Reuters) - U.S. stock market investors are gauging whether more volatility is ahead because of surging global energy prices, which could drive up inflation, erode profit margins and pressure consumer spending.

Stocks rebounded this week after Monday's losses left the S&P 500 down 5.2% from its record high hit in September. A truce in the U.S. Congress to avoid a debt default provided some relief, but investors remain worried about inflation, higher U.S. Treasury yields and the Federal Reserve's plan to unwind its easy money policies.

Energy costs are a major factor for inflation, and will be a key topic as companies report third-quarter results in coming weeks. Oil prices have surged more than 25% since late August, with Brent topping $80 a barrel and hitting three-year highs. Natural gas prices in Europe have rocketed, causing alarm among political leaders.

Oil prices have a "roughly neutral" affect on overall corporate earnings, according to Goldman Sachs (NYSE:GS) strategists, with every 10% increase in Brent prices boosting S&P 500 earnings per share by 0.3%.

Energy shares have soared as crude prices climbed, yet higher prices could weigh on companies ranging from transportation to consumer discretionary firms.

"We are going to find out if this piece of the inflation puzzle is the straw that breaks the camel’s back and actually starts cutting into margins," said Art Hogan, chief market strategist at National Securities. "There are incremental costs to everything when energy prices go up."

Despite September's pullback, the S&P 500 remains up about 17% so far in 2021. Even as investors swooped in to buy the market's latest dip, some Wall Street strategists are pointing to risks that could come with jumping into equities.

Analysts at Capital Economics said in a note that rising energy prices could put more upward pressure on bond yields. A jump in yields roiled stocks in recent weeks, particularly tech shares.

If oil prices keep rising toward $100 a barrel, that "could continue to weigh on sentiment," said Michael Arone, chief investment strategist at State Street (NYSE:STT) Global Advisors.

"If we break that barrier, I think it will influence how people are forecasting economic growth and inflation and interest rates, which has broad implications for sectors and industries and markets,” Arone said.

As oil gained since late August, the S&P 500 energy sector has increased 25% against a 1% drop for the overall index. Energy was the lone sector to post positive performance in September.

Oil vs U.S. stock market in 2021 https://fingfx.thomsonreuters.com/gfx/mkt/jnvweweglvw/Pasted%20image%201633718533077.png

The energy sector comprises less than 3% of the weight of the S&P 500, however, and rising oil prices can raise fuel and other costs for companies such as transportation firms, while also threatening demand by leading consumers to pay more, such as for gas at the pump.

JPMorgan (NYSE:JPM) strategists in a note this week outlined a basket of stocks negatively impacted by oil at $100 a barrel, including package delivery company FedEx (NYSE:FDX), discount retailer Dollar Tree (NASDAQ:DLTR) and auto parts retailer O'Reilly (NASDAQ:ORLY) Automotive.

In a note last week, U.S. economists at Deutsche Bank (DE:DBKGn) said the 101-cent increase in gas prices from a year earlier would be expected to lead to a reduction in income that can be spent on non-energy items of about $120 billion.

However, the relative amount of consumer spending on gasoline and other energy expenditures has trended lower over the past 40 years, according to data from Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.

The percent of personal consumption expenditures devoted to gas and other energy spending has fallen from over 6% in the early 1980s to 2.35% most recently, Janasiewicz said.

And JPMorgan strategists said markets would be able to digest oil at $130 a barrel, as the economy and consumer "were functioning just fine" over 2010-15, when oil averaged above $100.

"We do not believe that the current price of energy will have a significant negative impact on the economy," the strategists wrote.

Wall St Week Ahead: Energy price spike adds market risk as earnings arrive
 

Related Articles

Airlines say nations overreacted to Omicron variant
Airlines say nations overreacted to Omicron variant By Reuters - Dec 08, 2021

PARIS (Reuters) -Global airlines blasted governments on Wednesday for worsening the Omicron scare through snap border measures and "rip-off" virus testing regimes, and urged...

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email