Higher oil prices won’t affect earnings: Goldman
Goldman Sachs analysts see higher oil prices for the next few months, but they don’t think these will, on balance, translate to higher earnings for S&P 500 companies, with some poised to benefit while others suffer as energy prices rise.
“Higher oil prices should have only a minor impact on aggregate S&P 500 EPS as the boost to Energy EPS is offset by margin pressures and weaker consumer spending,” the analysts wrote.
This comes as energy companies’ performances in the last three weeks have surpassed the general market, rallying 11% vs. the S&P 500’s 1% gain. On April 6, West Texas Intermediate (WTI) crude oil was trading around $62 a barrel. On Monday it was trading around $69 a barrel.
Goldman expects oil prices to rise, but later in the year the gains will end, and they are looking at WTI trading at $69 within 12 months.
While higher oil prices will benefit energy companies, overall, they should have a minimal impact on aggregate S&P 500 earnings per share (EPS), with every $10 increase in the average price of oil adding roughly $1 to S&P 500 EPS. While energy companies benefit, higher energy costs will weigh on the profit margins of firms in other sectors as higher gasoline prices reduce consumers’ disposable income and curb their spending.
Goldman also cautioned that decelerating economic growth could pose a risk for the energy sector with the bank noting that its U.S. and global current activity indicators slowing to 3.4% and 4.6%, respectively, from 4.9% and 5.2% in February.