Oil, Dollar Hangover Casts Doubt on S&P 500 Earnings Estimates
- Profit risks also foreseen in interest rates, economic growth
- Deutsche Bank: `The worst of these drags should pass in 2015'
Falling oil prices and a strengthening dollar suggest earnings estimates for next year may be too high, according to David Bianco, chief U.S. equity strategist at Deutsche Bank AG.
The chart below shows the price of oil in New York trading and an index, compiled by the Federal Reserve, of the dollar’s value against seven other major currencies. Since last year’s third quarter, crude has dropped as much as $67.13 a barrel and the dollar index has climbed as much as 23 percent.
Every $5-a-barrel decline in oil reduces net income for Standard & Poor’s 500 Index companies by about $7.5 billion, or $1 a share, Bianco estimated in a Sept. 4 report. A 10 percent advance in the dollar’s value trims profit by about $20 billion, or $2.50.
Higher interest rates and slower economic growth may also hurt earnings, the New York-based strategist wrote. Each 0.25 percentage-point increase in the Federal Reserve’s key rate has the potential to reduce S&P 500 net income by 50 cents a share, the report said, adding that the global economy’s expansion may matter more for companies in the index than U.S. growth.
Bianco now expects S&P 500 earnings of $128 a share next year, up from $120 this year. For 2016, he wrote that $125 “is very possible” because of the effects of the dollar, oil and other influences even if U.S. gross domestic product, the value of goods and services produced within the country’s borders, rises 3 percent.
“The worst of these drags should pass in 2015,” the strategist wrote, adding that a valuation of 18 times earnings for the S&P 500 is justifiable because rates are low by historical standards. He reaffirmed that he sees the index reaching 2,300 next year, up from 2,150 this year. The latter prediction is below the median of 2,200 among 21 strategists as of Aug. 31 in a Bloomberg survey.
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