With the recent plunge in oil prices, the bulk of market chatter has been around how low gas prices should be saving consumers money, which should drive stocks higher. The purpose of this article is to examine why this is not exactly the case. First I will examine the correlation between gas prices and S&P 500 stock performance to see if there is any correlation at all between the two variables. Then, I will illustrate which economic sectors contribute the most overall EPS to the S&P.
For my analysis, I chose to use weekly S&P 500 data and weekly average gas prices from 1991-present. I chose this range because it was the longest amount of information I could retrieve on average weekly gas prices, and I believed that weekly averages brought increased granularity to the analysis, which can be found below.
Per the analysis, the two variables are actually positively correlated by 70%, which is counterintuitive to today's market thesis. One would expect that the two variables would be negatively correlated, so that declines in gas prices would lead to increases in S&P 500 performance, but the data shows the opposite. Why?
Distribution of Profits
Energy companies account for 10.74% of the S&P 500, and consumer discretionary accounts for 11.86%. The market value of companies tied to the price of gas and oil make up just as much of the companies that benefit from increased consumer spending. This premise destroys the thesis that low gas prices should drive indices higher, and lower-than-expected Black Friday sales and a tumble in retail stocks help deliver this fact. Low oil prices are good for the consumer, but not for overall S&P corporate profits.
If these facts do not discount higher index values based on low oil and gas prices, then this fact will: the energy sector consistently has produced the largest amount of EPS attributable to the S&P.
Looking at the quarterly EPS information above by economic sector, you can see that energy has made up the largest amount of EPS since 2008 up until the most recent fiscal quarter. What's more, consumer discretionary EPS has been around half the size of energy EPS until Q4 2014, which reflects the plunge in oil prices. Even over the projected four quarters of 2015, energy accounts for some of the largest attributable EPS figures, which means that declines in oil and gas prices, as well as other energy prices, hurts total S&P 500 earnings more than the benefit increased consumer spending will have on consumer discretionary EPS.
Surprisingly, gas prices and S&P stock performance over the last 13 years are positively correlated by 70%, not negatively correlated. This is caused by the fact that the S&P derives more EPS from energy companies than consumer discretionary companies. Thus, longer-term depressions in energy prices should lead to decreases in index values due to decreased energy EPS and less significant increases in consumer discretionary EPS.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.