The Outlook for Black Gold
Consumers may drive the U.S. economy, but oil greases the wheels of the Standard & Poor's 500-stock index. So when UBS (UBS) trimmed its earnings targets for the S&P 500 (calculated as combined earnings divided by shares outstanding) on Oct. 31, the revised projections had as much to do with the price of oil as with factors such as consumer spending. After predicting a mild to average recession, UBS now expects gross domestic product to decline through March 2009 before flattening out in the second quarter. Here are three forecasts for S&P 500 earnings.
Just weeks ago, UBS projected oil around $90 a barrel in 2009. Now it's saying $60. "The forces of deleveraging are greater than the commodity price relief to the economy," says David Bianco, the firm's chief U.S. equity strategist. He expects the recession to be "as bad as we've seen in the past handful of decades" and to limit S&P 500 earnings per share to $73, down from a projected $74 for 2008.
When oil was near $150, Bianco had to convince clients prices were too high. Now he's saying they're too low. He doesn't believe the amount of oil extracted can only decline but thinks getting crude out of the ground will cost more and could push the price to about $75. That's positive for oil service companies, industrials, and alternative energy. At this price, S&P earnings could be $80 per share.
A fragile economy and weak demand make triple-digit oil unlikely in 2009. But production remains tight, Bianco says, and any disruption in supply could push the price back over $100. In this case, strong oil wouldn't benefit the S&P. With Americans already on edge, $100 oil would be devastating for consumer confidence and the economy. It could push S&P earnings per share under $70.