S&P 500 earnings parade may slip on energy companies

The stock market indices in an upward mode as the corporate earnings are bringing cheer to the market in a more surprising way.

However, the forthcoming quarterly results from the energy sector may wipe out the gains recorded in October.

The continuous drop in oil prices has impacted the performance of oil and gas companies and the expected bleak earnings may dampen the market sentiment. Market analysts predict that in overall the energy sector may suffer over 60 percent drop in earnings. Global crude oil prices remain under pressure.

Over 15 NYSE-listed oil majors are announcing quarterly results in the first week of November. Oil companies such as Diamond offshore drilling, Columbia Pipeline, Newfield exploration and EOG Resources are announcing results this week.

Indicating year-to-date (YTD) losses of 43 percent, West Texas Intermediate (WTI) crude was trading at $46.59 a barrel on New York Mercantile Exchange. Brent Crude, the international benchmark, was at $49.56 a barrel, trading 43 percent lower in the past 12 months.

JPMorgan forecasts bleak outlook for the energy sector. Dubravko Lakos-Bujas, a strategist at JPMorgan, said in his report: "About half of S&P 500 companies have reported with 67 percent beating on bottom-line with an earnings surprise of plus 3.4percent. More importantly, guidance activity so far has been better than feared."

Other than the energy sector, analysts are upbeat on stock market gains as they expect year-end rally. The October gains built up confidence and Wall Street also recorded upward movement on the first session of November. Dow Jones Industrial average is also on positive terrain on the lines of S&P 500 and Nasdaq.
S&P 500 index rose one percent to surpass 2,100. Previously it crosses this mark on 18 August and last close was on 17 August. Despite crude oil down by one percent, the energy sector rose 2.4 percent.

Chevron, 3M and Exxon Mobil added the most to the gains of Dow. The Nasdaq-100 comprising mostly non-financial firms rose to 52-week high and near to previous record level of 4,704.73 points in March 2000.

The general earnings scenario may be better than expected this time and some investors are getting into buying mode as well, observe analysts.

According to RBC Capital Markets, the upstream segment comprising exploration and production is expected to drop 95 percent. The midstream segment comprising transportation, storage and marketing may ease 25 percent. The downstream segment comprising refining and processing my drop 42 percent.

Merrill Lynch is upbeat on the energy sector as it says energy stocks are attractive for institutional investors, who have started adding to their portfolios. Many exploration and production companies are priced oil $65 range from the existing spot price of $46.38.

It also advises lower risk companies to stay in oil stocks as the August crash pulled back valuations with much upside as higher beta stocks.

Market analysts fear that if the US hikes interest rate then it would have a major impact on the performance of the American industry in the wake of the ongoing slowdown in China's economy. The materials and industrial sectors have major exposure to emerging economies and these segments may also suffer profit drop of 16 percent and three percent respectively.