Oil Prices And S&P Profit Forecasts

JPMorgan recently increased its profit estimate for the S&P 500 2011 earnings from $94 to $97.50. The bank is not alone in its optimism. The direction of the market, which has recently hit two-and-a-half year highs, is surely a sign that investors expect an outstanding year.

West Texas crude prices moved near $107 a barrel and Brent is as high as $116. It is not too early to wonder how corporate profits for large American companies can weather this kind of energy inflation. The answer is that they most certainly cannot. The forecast for S&P earnings ought to be moving lower and not higher.

The S&P 500 includes a great many stocks in the retail, consumer goods, restaurant, and travel sectors. The profits of the firms in these industries could disappear. Airlines have already warned that jet fuel prices will damage them financially. It will not be long before companies like Yum Brands (NYSE: YUM) and Kraft (NYSE: KFT) will say that their earnings prospects are based on their ability to pass energy and commodities prices on to their customers. Gas prices have already undermined consumer spending. This, married with unemployment and the drop in home prices,  has pushed the typical Americans back against the wall.

The market will be one of the great victims of oil prices, but oddly enough investors have not traded that way. The S&P 500 is up almost 5% this year. It has raced higher at a more rapid pace than that over the last month.

Many brokerage economists and independent forecasters believe that the S&P will end the year at 1,500, up from its current level of  1,325. Anyone who watches the prices of oil daily know that forecast is less and less likely.

Douglas A. McIntyre