Lance Jepsen of GuerillaStockTrading has issued a trader alert regarding oil prices. So goes oil, so goes the US economy.
Traders and investors are looking for a continuation of strong earnings to justify high stock valuations, now trading near their highest levels since 2004.
Most of the expectation for a recovery in earnings is predicated on oil prices being around $47 to $55 a barrel. If you don’t get those numbers, you do not get the strong earnings the stock market needs to warrant the high S&P 500 P/E ratio of around 25.
U.S. crude futures have been pressured lower by a supply glut. They’ve averaged over $48 per barrel so far this quarter, however, traded around $43 on Friday and are down over 20 percent from February, when they hit an 18-month high.
U.S. stocks are in the ninth year of a bull run that has been fueled of late by bets on pro-growth policies from U.S. President Donald Trump. But with the timetable for reforms extending further into the future, earnings are regarded as a crucial support for stock prices.
Revenue expectations have dropped for 10 of 11 industry groups since early April.
The benchmark S&P 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, Thomson Reuters data shows.
While lower oil prices can help some sectors such as industrials and transports, as well as boosting consumer sentiment, high expectations for earnings growth mean any stumble will be felt broadly.
Energy industry profits are seen up an incredible 683% from a year ago according to Thomson Reuters data. Without energy, profit growth estimates drop to 4.8 percent for the quarter.