BofA: Oil Weakness, Dollar Strength Damp Outlook for S&P 500

January 21, 2015

The biggest publicly traded companies are going to have a hard time growing profits this year as weak oil and a strong dollar take their toll.

Bank of America Merrill Lynch predicted as much in a report that cut its S&P 500 earnings growth forecast to 1 percent from 5 percent for 2015. The bank lowered its estimate of earnings per share for the index to $119.50 from $124 while maintaining a year-end target of 2,200.

“Our forecasts assume a modest pick-up in oil and global growth, and no reversal of the dollar strength,” Dan Suzuki, an analyst at BofA in New York, said in a January 20 report obtained by MoneyNews. Dollar strength “represents a drag on EPS.”

The price of crude traded in New York plunged almost 60 percent from last year’s June high of about $108 to $44 a barrel this month. Demand weakened as China’s economic growth slowed and the fracking boom helped to boost U.S. production to the highest since 1983.

Meanwhile, the dollar soared to a 10-year high against other major currencies on speculation that the Federal Reserve will raise interest rates this year. Also, the Bank of Japan and European Central Bank are weighing monetary stimulus plans that would lower the value of their currencies compared with the dollar.

“The benefit to the consumer from lower energy costs generally outweighs the headwinds of lower energy profits and investment,” according to BofA. “But the impact for the S&P 500 EPS is quite the opposite: the direct hit from lower energy earnings and capital investment greatly outweighs the positive impact of increased consumption and lower energy input costs.”

BofA isn’t the only firm setting a cautious tone for the S&P 500 in 2015.

The mean average of Wall Street strategist estimates is 2,185, according to CNBC. That year-end target is 8 percent higher than the market close on January 20.

French bank Societe Generale is the most bearish with a target of 2,050.

“Since 1875, we have never seen the S&P rise for seven calendar years in a row: an eighth year seems highly unlikely,” Alain Bokobza, an analyst at Societe General, said in a report cited by the news channel.