US Markets

Here's why the stock market should start caring more about falling oil prices

Key Points
  • Crude prices hit a five-month low on Thursday, but the stock market shrugged off the fall.
  • Lindsey Bell of CFRA said about half the first-quarter earnings growth comes from energy.
Slowing demand in Asia while crude builds up: Analyst

Equity investors might want to pay more attention to oil's latest plunge.

Crude prices hit a five-month low on Thursday as mixed U.S. inventories data compounded bearishness already brewing in the energy complex. Stocks, however, reacted mildly to the fall, hovering just below breakeven for most of the session.

More broadly, U.S. oil has fallen more than 15 percent this year while stocks have been on fire —the rising more than 6 percent and trading just below its record high of 2,400.98, in part because of strong corporate earnings.

Lindsey Bell, investment strategist at CFRA, said first-quarter earnings growth totals 14.5 percent, and a big chunk of that has come from one sector: energy. Bell added that earnings growth totals just 7.2 percent for the quarter when excluding energy.

This was an eagerly awaited earnings season for Wall Street, as investors were concerned whether the stock market's high valuation attained during a rally since the U.S. presidential election was actually justified.

The S&P 500 shot through the roof after President Donald Trump was elected, amid expectations of lower corporate taxes, deregulation and more government spending.

Persistent weakness in oil prices, however, could send the energy shares and earnings reeling, as it did in the early part of 2016.

Oil marooned near five-month lows

Bell said first-quarter 2016 earnings growth totaled negative 6.7 percent when including the energy sector. That number improved to negative 1 percent when excluding energy.

Kate Warne, investment strategist at Edward Jones, said investors are paying attention to the fall in oil prices, but not as it relates to earnings.

"Sometimes falling oil prices are indicative of global demand which could lead to a slowdown in economic growth," she said.

Crude prices plunged below $30 a barrel in early 2016 as a supply glut dragged them lower. The massive fall in prices led to concerns about the health of the global economy; these concerns also pressured global equity markets.

S&P since Jan. 1, 2016

Source: FactSet