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Crude Oil Is Still Weighing On Expected Earnings, But Not For Long If Consumers Spend Their Energy Tax Cut

Depressed crude oil prices continue to weigh heavily on expected S&P 500 corporate earnings, and to some extent, on the broader stock market. Although spot West Texas Intermediate (WTI) crude recently stabilized at $46-$48/barrel, anticipated S&P 500 earnings have yet to find a bottom. According to S&P Capital IQ consensus data, expected 2015 S&P 500 earnings have now dropped to $121.60 as of Jan. 26, from a more robust and much more investor-optimistic $132.67 as of mid-year 2014. Extending out to year-end 2016, anticipated S&P 500 quarterly earnings on average dropped by approximately $2.30 per share on Jan. 21, or by 6.5% from June 2014 expectations (see chart). 

Energy is not the only sector seeing a steep drop in forward earnings expectations, though it has by far declined the most. Excluding telecommunication services, all sectors comprising the S&P 500 equity index have recorded a decline in average 2015 quarterly earnings growth compared to where expectations stood at mid-year 2014. Some sectors, such as information technology, financials, and consumer discretionary, are expected to fare better than the energy and materials sectors, according to S&P Capital IQ consensus earnings data (see table). 

Undeniably, declining energy-related household expenditures represents a boost to disposable income, and by extension the personal consumption-driven U.S. economy. But the question remains: How much of a boost? The S&P Capital IQ Global Markets Intelligence (GMI) research group will continue to track various indicators of consumer confidence and U.S. retail sales for evidence that the windfall crude-oil derived tax cut is energizing household consumption patterns. As of year-end 2014, retail sales - excluding gasoline service station sales, recorded the second-highest monthly dollar level on record after declining slightly from November, but still representing a healthy 5.25% advance versus levels from a year ago. This is significant improvement over the 4.1% growth rate recorded at year-end 2013. Any subsequent improvement in consumer confidence and retail sales would suggest that consumers are spending some portion of their energy-related tax cut, implying positive news for prospective corporate earnings growth from the more economically sensitive sectors of the stock market. 

Click here to read the latest edition of the Lookout Report and watch the overview of the report in this video.

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