Wall St Week Ahead Rising Energy Prices Adds Market Risk As Profits Come In


A sign indicating Wall Street is visible outside the New York Stock Exchange (NYSE) in New York, New York, United States on June 28, 2021. REUTERS / Andrew Kelly / File Photo

NEW YORK, Oct. 8 (Reuters) – U.S. stock investors are assessing whether increased volatility is ahead due to soaring global energy prices, which could push up inflation, erode profit margins and put pressure on consumer spending.

Stocks rebounded this week after Monday’s losses left the S&P 500 (.SPX) down 5.2% from its September record. A truce in the US Congress to avoid default has brought some relief, but investors remain concerned about inflation, rising US Treasury yields and the Federal Reserve’s plan to unwind its easy monetary policies.

Energy costs are a major driver of inflation and will be a key topic as companies release their third quarter results in the coming weeks. Oil prices have jumped more than 25% since late August, with Brent surpassing $ 80 a barrel and hitting three-year highs. Natural gas prices in Europe have skyrocketed, causing concern among political leaders. Read more

Oil prices have a “roughly neutral” effect on overall corporate profits, according to Goldman Sachs strategists, with each 10% increase in Brent prices increasing the S&P 500 earnings per share by 0.3%.

Energy stocks have soared as crude prices have risen, but higher prices could weigh on companies ranging from transportation to consumer discretionary companies.

“We’re going to find out if this piece of the inflation puzzle is the straw that breaks the camel’s back and actually begins to squeeze margins,” said Art Hogan, chief market strategist at National Securities. “There are additional costs for everything when energy prices go up. “

Despite September’s pullback, the S&P 500 remains up around 17% so far in 2021. Even as investors rushed to buy the latest market drop, some Wall Street strategists point to the risks that could come. of a leap in stocks. Read more

Capital Economics analysts said in a note that rising energy prices could put more upward pressure on bond yields. A surge in yields has rocked stocks in recent weeks, especially tech stocks.

If oil prices continue to rise to as high as $ 100 a barrel, that “could continue to weigh on sentiment,” said Michael Arone, chief investment strategist at State Street Global Advisors.

“If we cross this barrier, I think it will influence the way people forecast economic growth, inflation and interest rates, which has broad implications for sectors, industries and markets,” he said. said Arone.

As oil has gained since late August, the S&P 500 (.SPNY) energy sector has risen 25% versus a drop of 1% for the overall index. Energy was the only sector to post a positive performance in September.

Brent vs S&P Energy vs S&P 500

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

JPMorgan strategists in a note this week described a basket of stocks negatively impacted by oil at $ 100 a barrel, including parcel delivery company FedEx (FDX.N), discount retailer Dollar Tree (DLTR. O) and auto parts retailer O’Reilly Automotive (ORLY.O).

In a note last week, U.S. economists at Deutsche Bank said the 101-cent increase in gas prices from the previous year is expected to result in reduced income that can be spent on non-energy items. of about $ 120 billion.

However, the relative amount of gasoline consumption and other energy expenses has tended to decline over the past 40 years, according to data from Jack Janasiewicz, portfolio manager at Natixis Investment Managers Solutions.

The percentage of personal consumption spending on gas and other energy expenses has increased from over 6% in the early 1980s to 2.35% more recently, Janasiewicz said.

And JPMorgan strategists said markets would be able to digest oil at $ 130 a barrel, as the economy and consumption “performed very well” in 2010-15, when oil averaged over $ 100.

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

Reporting by Lewis Krauskopf; Editing by David Gregorio

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