Earnings Estimates Face Pressure As Crude Oil Risks Rise

Earnings cuts are making a comeback with estimates for FY27 already seeing a cut of roughly 3%, driven by high crude oil prices and geopolitical tensions in West Asia.

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According to a recent report from Bernstein, the main focus will be on crude oil as it could help determine how companies and markets perform. As per the report, falling crude prices below the $90 mark could help alleviate the pressure off earnings and even assist in investment expenditure along with fiscal benefits.

However, high crude oil prices for long periods can hurt earnings growth while putting additional pressure on fiscal positions and current account balance.

According to the report, a de-escalation in the U.S.-Iran situation could spark a relief rally in equity markets.

However, any such rally may be limited by weaker macroeconomic conditions and a potential increase in equity issuance activity.

Bernstein maintained its year-end Nifty target of 26,000 and retained a Neutral stance on the market.

Earnings Momentum Slows

Within Bernstein’s NSE200 coverage universe, FY27 earnings growth is currently projected at around 10%, compared with a 14% compounded annual growth rate recorded over the previous two years.

Most sectors have seen downward revisions to earnings expectations. Metals, Information Technology and Telecom have been among the few sectors where estimates have remained relatively stable.

Consumer Discretionary, Utilities, Information Technology, Building Materials and Automobiles continue to factor in stronger earnings momentum, while Healthcare and Real Estate are expected to witness an improvement in growth rates.

Sector Allocation Changes

The report showed a reduction in exposure to consumption-linked sectors, including staples and automobiles.

Finances have been shifted to Equal Weight, whereas Real Estate continues to remain Overweight. Healthcare and Industrials continue to become more prominent as far as portfolio weight is concerned. On the energy front, Oil Marketing stocks are elevated to an Overweight rating on account of increased fuel prices.

According to the most recent changes in earnings estimates, it is anticipated that the price of crude oil, amongst other factors, will play an important part in earnings for the next quarter.