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Energy price spike adds market risk as earnings arrive

U.S. stock market investors are gauging whether more volatility is ahead because of surging global energy prices, which could drive up inflation, erode profit margins and pressure consumer spending.


Stocks rebounded last week after Monday’s losses left the S&P 500 (.SPX) down 5.2% from its record high hit in September. A truce in the U.S. Congress to avoid a debt default provided some relief, but investors remain worried about inflation, higher U.S. Treasury yields and the Federal Reserve’s plan to unwind its easy money policies.


Energy costs are a major factor for inflation, and will be a key topic as companies report third-quarter results in coming weeks. Oil prices have surged more than 25% since late August, with Brent topping $80 a barrel and hitting three-year highs. Natural gas prices in Europe have rocketed, causing alarm among political leaders.


Oil prices have a “roughly neutral” affect on overall corporate earnings, according to Goldman Sachs strategists, with every 10% increase in Brent prices boosting S&P 500 earnings per share by 0.3%.


Energy shares have soared as crude prices climbed, yet higher prices could weigh on companies ranging from transportation to consumer discretionary firms.


“We are going to find out if this piece of the inflation puzzle is the straw that breaks the camel’s back and actually starts cutting into margins,” said Art Hogan, chief market strategist at National Securities. “There are incremental costs to everything when energy prices go up.”


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Analysts at Capital Economics said in a note that rising energy prices could put more upward pressure on bond yields. A jump in yields roiled stocks in recent weeks, particularly tech shares.


If oil prices keep rising toward $100 a barrel, that “could continue to weigh on sentiment,” said Michael Arone, chief investment strategist at State Street Global Advisors.


“If we break that barrier, I think it will influence how people are forecasting economic growth and inflation and interest rates, which has broad implications for sectors and industries and markets,” Arone said.


As oil gained since late August, the S&P 500 energy sector (.SPNY) has increased 25% against a 1% drop for the overall index. Energy was the lone sector to post positive performance in September.

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