It’s More Than Just Wall St Oil Analysts Asleep At The Forecasting Switch

Yes, folks, we’re almost halfway through the year. Just five trading days this week and we’ll close the books on the second quarter and the first half of 2017. The good news is next week is a short one with the upcoming July 4th holiday (one of our favorites here at Tematica), but soon after the 2Q 2017 earnings bonanza will begin.

We’ve been getting some drips and drabs of earnings reports over the last few weeks, but we’ll see that pick up dramatically even before Alcoa (AA) reports its quarterly result on July 17. One quick comment on the 2Q 2017 earnings calendar, given the timing of the July 4th holiday, odds are we will once again see a compressed earnings cycle like we did with 1Q 2017 earnings due to the Easter holiday. If you forgot, it was fast and furious, especially on Thursdays and we don’t expect that to change this time around. More on that once we clear the upcoming holiday.

With a handful of days left until we shut the books on June and 2Q 2017, all three major stock market indices are up more than 8 percent year to date, with the Nasdaq Composite Index up an impressive 16.3 percent as of Friday’s market close. Here’s the thing, more than half of the returns occurred during 1Q 2017, with 10 percentage points of the Nasdaq’s climb happening during those first three months of the year. Over the last several Monday Morning Kickoffs we’ve shared a number of views as to why this was likely to happen, including the notion that much like rubber bands, valuations can only going to stretch so far.

Crude Oil Slips into Bear Market Territory

Hands down, the biggest news last week was had in the energy “sector” as oil prices continued their move down, officially moving into bearish territory. Tematica’s Chief Macro Strategist Lenore Hawkins and Tematica’s Chief Investment Officer discussed this on last week’s podcast as well as several other items that continue to fetch their interest – hint: Amazon’s (AMZNlatest moves with Whole Foods (WFM) and Nike (NKEwas one of them as Amazon continues to expand the number of thematic drivers behind its businesses. If you missed the podcast, you can click here, but we do recommend you subscribe on iTunes.

Back to the slump in oil prices… Crude’s slide is due not only to growing supply but also weak demand. Not to sound like a know it all, but supply-demand dynamics are pretty much economics 101, and when we see ramping US supply alongside a slowing domestic economy, it hasn’t been hard to guess where the price of oil is headed. The proverbial second shoe to watch is earnings. We mention this because, according to FactSet, the energy sector is expected to be the biggest contributor to EPS growth for the S&P 500 in the current quarter. With oil at just over $43 per barrel, well below the $51 level it averaged in 1Q 2017 and the $52 mean estimate for the average price of oil for Q2 2017, we’ve started to see Wall Street respond with price target and EPS cuts.

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