Knife-edge

‘Fragile’ might be a word used to describe last week’s short-lived ceasefire. Or the current state of global markets. It’s certainly not how anyone’s describing U.S. corporate earnings.

Major banks kicked things off: Goldman Sachs ($GS) beat earnings estimates with US$17.55 in EPS, up 17.34% YoY. JPMorgan ($JPM) reported US$5.94 in EPS, while Citi ($C) and BlackRock ($BLK) also delivered strong results. 

FactSet estimates the S&P 500 will see 12.6% Q1 earnings growth, marking six straight quarters of double-digit growth. And given oil’s 77% Q1 rise, it might seem counterintuitive to learn the energy sector is expecting the third-largest earnings decline. An unlikely candidate was the sector’s largest contributor: Exxon Mobil ($XOM).

Exxon reports in May, but last week the company signalled downstream earnings could be negatively impacted by up to US$5.3B. See, Exxon sells fuel cargo that takes weeks to arrive, so it hedges against fuel price dips with derivatives. 

The problem? The war has blocked shipments through Hormuz, delaying physical deliveries, and yet the hedges still settled at a loss when oil spiked. Profits will arrive when the cargo does, but the timing mismatch means Exxon expects to report US$1.20 in Q1 EPS, down from US$1.71 in Q4.

Its main export, crude oil, traded higher after the U.S. announced a blockade of maritime traffic in and out of the strait. But WTI futures pulled back after signs that a deal might be back on the table, again.

That same news sent the S&P 500 up 1.02% on Monday, closing at its highest level since the war began, and extended the move even higher on Tuesday. Oracle ($ORCL) led with a 13% spike, while software stocks ServiceNow ($NOW) and Atlassian ($TEAM) staged an early-week recovery.

It seems cross-sector pullbacks and comebacks are simply part of the kangaroo trend we’ve come to expect. But there’s no denying that energy stocks have carried pockets of the market through the turbulence.

Analysts predict energy companies will grow EPS by over 35% in the next four quarters, even as oil volatility looks like it's here to stay. And by May, U.S. Gulf Coast crude exports are expected to hit a record five million barrels per day. 

Right now, it’s a knife-edge market. Buyers and sellers are evenly matched, and every headline has the power to tip the balance.

This is not financial advice nor a recommendation to invest in the securities listed. The information presented is for general information purposes only and intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. The author of this article and other employees of Stakeshop Pty Ltd may hold positions or have financial interests in the company (or companies) discussed above. As always, do your own research and consider seeking financial, legal and taxation advice before investing.