Falling oil prices will help the economy, but not stocks, according to a Bank of America Merrill Lynch Global Research report provided to Moneynews.
December West Texas Intermediate crude contracts were trading at $77.35 a barrel on the Nymex Wednesday midday after hitting a three-year low of $75.84 last week.
Lower oil prices lift GDP by 20 to 25 basis points for every $10 annualized drop in oil prices, according to BofA economists.
But the S&P 500 index doesn't benefit, because it is "more levered to business spending and commodities than domestic personal consumption," states the report, written by Savita Subramanian, head of U.S. equity and quantitative strategy for BofA.
The economists estimate that a 10 percent decline in oil prices reduces S&P 500 earnings per share by $1.00 to $1.50. "All else equal, if current prices were to hold for 2015, it would represent $2 to $3 of downside to our $127 EPS forecast."
To be sure, that doesn't mean BofA analysts are bearish on energy stocks.
"We refrain from the knee-jerk reaction to sell energy and buy consumer stocks on lower oil," Subramanian says. "Funds maintain a record underweight in energy, and it is the only sector trading at more than a 10 percent discount versus history" on metrics such as price-earnings, she writes.
"We continue to prefer the large, diversified energy companies with growing cash flows and dividends."
But BofA believes weak oil prices are "transitory and mainly driven by increased supply, which is likely to be relieved by an OPEC cut and a slowdown in U.S. shale production." In addition, the economists expect oil demand to increase worldwide next year because of the lower prices and a stronger global economy.
They predict WTI prices will rebound to $85 a barrel in the fourth quarter and to $90 a barrel in 2015.
Meanwhile, market sentiment remains bearish toward oil.
"There's uncertainty about OPEC and whether it will or will not cut production at its Nov. 27 meeting," Kyle Cooper, director of commodities research at IAF Advisors, tells Bloomberg
"They probably wouldn't have to do that much to stabilize the market but until some action is taken there's not a lot of upside for this market."
© 2024 Newsmax Finance. All rights reserved.