Markets brace for big oil profit plunge

NEW YORK (AP) – It’s just a forecast, and for only one of 10 industry groups in the stock market. Yet it has almost singlehandedly turned what had been a strong earnings season into a weak one.

Profits for companies in the Standard & Poor’s 500 index are expected to have grown in the fourth quarter at one of the lowest rates in years, just 2.2 percent. The culprit: Energy companies that suffered as oil prices plunged. Their profits are expected to have dropped 23 percent, a collapse of fortune nearly unheard of outside of a recession, and one that has weighed on the stock market.

Investors will find out just how ugly the earnings are as oil companies report results over the next several days.

So far, things don’t look so good. Several oil producers and service companies have announced layoffs and reductions in spending on new drilling projects. BP told workers Monday that it would freeze pay for 2015. On Friday, Chevron posted a 30 percent decline in fourth-quarter profit, a day after Royal Dutch Shell reported a 57 percent drop.

Stocks in energy companies have fallen nearly 12 percent in three months, nearly cancelling out moves up for most other industries. The S&P 500 is up less than one percent in that time.

Lower oil prices are good for the economy and most businesses, but they are bad for the stock market in the short term. Energy companies have an outsized effect on the S&P 500 index because they are among the most valuable members of it.

Instead of giving equal weight to each of the companies, the S&P 500 ranks them according to their market value. Exxon Mobil, worth $385 billion, is about 10 times the average value of a company in the index

Why does that matter? Every percentage move in Exxon’s stock, up or down, pushes the index up and down as if Exxon were 10 companies. Exxon’s stock has fallen 16 percent from June when oil began to slide from $107 a barrel to $44 currently. Chevron, another heavyweight in the index, has fallen 27 percent.

Stock prices have already suffered because investors know what’s coming.

Big oil earnings are relatively predictable because oil production is fairly steady and prices are set on open markets. While a company such as Apple can surprise investors by revealing just how popular a new product is with consumers, oil is always in fashion. Analysts can make reasonably good guesses about how much oil a company produced in a quarter, and what prices they were able to sell it for.

When all the results are tallied, the plunge in energy company earnings is expected to be by far the worst among the 10 sectors in the S&P 500, according to FactSet, a financial data provider. Without that hit, earnings for the S&P 500 would be on track to grow a healthy 5.1 percent instead of 2.2 percent. The growth rate has been lower only three times in the last five years.