Stock Market Leadership In 2018 To Come From Oil & Gas

By: WMA

The thirty-three (33) Oil & Gas companies of the S&P 500 will lead that important benchmark, maybe not during January, but through 2018 and beyond. The reason is simple. It’s all about revenue, cash flow and earnings growth on account of higher Crude Oil prices, rising to the level where this crucially important industry is now achieving sustainable economics.

The Oil narrative is changing. No longer is the industry full of doom and gloom.

Investors who study a company’s fundamentals before taking positions in stocks got on board early. Trend followers have now gotten the message and are becoming invested. At some point this year, the public will follow. Oil stocks will lead the S&P 500 by the end of 1Q2018. 

The broad issue to consider at present is why is investor sentiment changing 180 degrees to now favoring Energy.

For starters, the World Bank is estimating that the global economy is growing now at +3.1% annually. Rapidly growing economies need increasing amounts of Oil. Since 2014, however, producers of Oil severely held back their capital expenditures for exploration and development, to unsustainably low levels. So, with demand on the rise and supply being constrained, especially with production cuts agreed by OPEC + Russia, at some point the $WTI and Brent Oil prices had to rise. They have been since the summer of 2017, doubling to the $63-$69 level, which is now impacting corporate operating results quite significantly.

We know that as the S&P 500 rises, the leaders are always winners while the laggards could be losers unless new money is brought to the table during periods of monetary expansion, in which case even laggards can be winners as witnessed since early 2009. As we say, a rising tide floats all boats.

However, we are now wary because the highly favorable market conditions experienced since 2009 are unlikely to continue. That’s because G-20 central banks are now in a monetary contraction cycle and we expect them to remain so through 2018-2020. Policy reversals of this extent require a radical change in our thinking. The squiggly line era of blindly chasing momentum stocks is over, replaced by analysis of the factors that truly drive market prices, which happen to be corporate fundamentals.

From consensus earnings estimates, it appears that S&P 500 components will grow their earnings +13.7% in 2018 over 2017 and +9.5% in 2019 over 2018. The Dow 30 companies are projected to grow earnings by +11.4% this year. The public is impressed. The broad market indexes are rising.

However, the S&P 500 figures include the 33 Oil & Gas companies that are expected to grow their earnings by an average +65.5% and +25.6% respectively, which is significantly better than the rest. Therein lies the important story

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