A once-reasonable assumption on Wall Street is turning into a disaster

It’s only been a week, and 2016 has been brutal for the financial markets.

In just four trading sessions, the S&P 500 has tumbled 3.8%.

Assuming the underlying fundamentals haven’t changed, this bout of volatility would arguably be a buying opportunity for the patient, level-headed investor.

But at least one fundamental driver value has deteriorated substantially in recent weeks, forcing some high-profile stock market experts to begin reassessing their forecasts.

“Our single-point 2016E S&P [earnings per share] of $125 assumes that oil prices average about $55/bbl in 2016,” Deutsche Bank’s David Bianco said in a new note to clients Wednesday. “This seemed reasonable several weeks ago, but now it doesn’t.”

Oil prices were trading near $40/bbl a month ago when Wall Street’s strategists were rolling out their 2016 stock market targets. Now, it’s trading near the low $30s. And the S&P 500 has significant exposure to oil prices. The energy sector has been the primary source of weakness in stock prices and earnings.

On Wednesday, Oppenheimer’s Fadel Gheit warned 2016 could be a worse year for energy stocks than 2015.

Bianco isn’t exactly shocked by what’s happening. And neither are his clients. Back in December, he warned that the energy sector was a “value trap” in that sector stock prices assumed much higher, more optimistic oil price scenarios.

“A 25% rally in oil prices would result in only $40-45/bbl oil,” Bianco said Wednesday. “This is still too low for Energy sector profits to be up in 2016. Moreover, the relationship between profits and the commodity price is now very uncertain. The estimate we made of Energy profits up 15% is clearly too high now and until we see oil stabilise and get 4Q earnings reports from Energy companies, we are simply unsure how much to cut our Energy and thus overall 2016 S&P EPS estimate.”

Bianco sees the S&P 500 going to 2,250 in 2016.

On December 31, RBC’s Jonathan Golub cut his S&P target to 2,225 from 2,300, blaming low oil prices among other things.

OilFinVizWTI oil prices

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