All that talk of less inflation and lower oil prices is going to create some problems. The strategists at Bank of America Merrill Lynch have issued some additional weakening trends for oil, inflation and even some of the growth of the equity markets.

Merrill Lynch has kept its 2017 outlook for $129 in earnings per share for the S&P 500 index, but the firm lowered its earnings forecast for the S&P 500 in 2018, even as many U.S. multinational companies are revising their earnings higher. The $2 per share cut to $135, a revision of about 1.5%, was not an economy-based cut but was tied to lower oil earnings. The price of black gold is now in a bear market again, and earlier in June there were rumblings that crude might test the $40 per barrel mark one more time.

Benchmark West Texas Intermediate crude was trading above $44.00 on Thursday’s close. The analyst now suggests that oil will average $49 per barrel in 2017 and $51 2018. While these lower targets might not seem catastrophic, the reality is that this is very bad news for the longer-term oil strategists, if the Merrill Lynch call proves right. The firm’s prior 2017 estimate for oil was $53, but the prior 2018 outlook was for $60 per barrel.

The Merrill Lynch call did note that any real tax reform and a return back to $60 in oil could add another 10% upside to its earnings forecast for the S&P 500. That being said, the firm also warned that a market coupled with no tax reform and $30 oil would lower the firm’s earnings estimates by 10% more.

Other market analysis from Merrill Lynch noted that any dips in health care and biotech should be bought, while a weak trend in energy should have investors and traders sell into any strength in energy.

Merrill Lynch also has noted that the global economy remains on track for slightly above-trend GDP growth of 3.5% in 2017, although core inflation remains stuck well below the targets of major central banks.

Another consideration is that more and more oil wells are close to being turned back to producing, so any rising oil prices will only foster that much more conventional and unconventional drilling in the United States. What does it mean for S&P 500 earnings if Merrill Lynch’s oil price forecast for 2018 is still too high?

Calls of this nature are not generally big market-moving calls. That being said, some of the hope about oil might be dashed for longer-term views.

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