Oil prices: The ‘risk remains to the upside,’ strategist says

eToro Global Markets Strategist Ben Laidler discusses the stock market setup as stocks rally and oil prices rise.

Video transcript

AKIKO FUJITA: Well, let's continue the market conversation now. With earnings season just around the corner, investors are going to be watching for Q3 numbers to roll in. But as ever, it could be forward-looking guidance that's key as recession fears build. For more on what's ahead, let's bring in Ben Laidler. He is eToro global markets strategist.

Ben, you have said that your recovery tracker is starting to show signs of improvement in terms of sentiment. What do you make of this two-day rally we've been seeing?

BEN LAIDLER: I think the stars are realigning again. I think we're getting visibility on the end of this Fed cycle. We've got a couple of big hikes still to come. But I think the Fed could stop hiking by Christmas, and we're getting visibility on that. I think this overdone bond capitulation that we saw that took 10-year yields to 4% is beginning to unwind, and that's taking some of the pressure off of valuations. And then, as you say, we're heading into third-quarter earnings season.

Well, I think the setup is very similar to second quarter, where we all got very depressed. Expectations got slashed. We were all fearing the worst. And companies proved pretty resilient and were able to leap over that sort of lower bar, and I think we're going to see that again. So you put all that together, and I think we're sort of building another bottom here. And whether this is another bear market rally or the real deal, I suspect we're building a bottom rather than setting up for, you know, the next bull market. I think that's going to take the Fed actually cutting interest rates, but I'll take this, you know, 25% down in markets. With sentiment this depressed, with valuations this low and earnings and the consumer this resilient, I think that it's really all to play for.

AKIKO FUJITA: Yeah, it feels like that's kind of what we're hearing across the board, people saying, we'll take it, you know, even if it is just building the bottom there. Let's talk about your expectations in terms of earnings. As you said, you know, when we look at the numbers over the last few quarters, it has been about the quarter-on-quarter decline, not so much the year-on-year comps that we've been seeing. You say, this time around, it's even more important to look at the guidance moving forward. What's your expectation on that front, especially when you consider the headwinds that are still there? Inflation, but as well as FX, certainly a big one that we have heard over and over from so many of these companies.

BEN LAIDLER: Absolutely. I mean, these companies are seeing a lot of headwinds. I mean, the economy is cooling. The dollar's strong. Interest rates are going up. You know, consumer balance-- consumer cash flows are still under pressure. And yet despite all that, I think the narrative is going to continue to be that these companies are-- have been very, very resilient. And I think you're going to see that again.

I think the reported numbers are going to be positive. Yes, expectations have come down a lot. But I think, given all those headwinds, positive numbers will a-- will be well taken. And I think the guidance is going to hang on in there. I mean, you've seen plenty of downgrades, and, you know, we all have seen the misses from, you know, FedEx onwards. But I think what's less talked about is the number of companies that have actually been raising or reiterating guidance. Those numbers have actually been, you know, very reassuring. So I'm not expecting a great quarter, but expectations are a lot lower than that.

And again, I think this is all about the expectations. I think companies are going to sort of meet those lowered expectations. And basically, we're going to live to fight for another three months. And that gives us time for the Fed to take its foot off the interest-rate accelerator and forward-looking markets to, you know, begin to price in, you know, the-- the beginning of the end.

AKIKO FUJITA: So let's try to break that down by sectors. Energy's certainly been in focus over the last few sessions. We've got this big OPEC+ meeting coming up. This is a sector that has really seen some big gains. But when you think about to the last quarter, a lot of questions about whether, in fact, we've seen the top on that. These are companies in terms of the big oil majors that have seen record profits. Do you see more upside there?

BEN LAIDLER: I do. And actually, energy stocks have been much more resilient than-- than crude oil prices. And I think that tells you a lot. That tells you this sector is very cheap. It's the cheapest sector out there in the market. It tells you that-- although they might never confess this, I think they probably prefer $80, $90 oil than $120 oil. You know, and it's a much more sustainable price, and it's still a price where they make fantastic profits. And remember, the average break-even cost for an oil major is something like $20 a barrel. And with oil here at $80, $90, we're still talking very strong cash flows, very strong dividends.

So I think this remains-- I think this remains a core holding. And I would also say, I think the risk remains on the upside for oil prices. I mean, we talk a lot about the sort of demand fears and recession, and we lose a little bit sight of everything that's going on in the supply side, whether it's an OPEC cut, whether it's the end of Strategic Petroleum Reserve sales, whether it's drilling activity 50% of previous peak levels. I mean, I could go on. But the supply side remains very, very tight, and that's what's going to support this oil market.

AKIKO FUJITA: Very quickly, Ben, on crypto, when you think about where things have trended, Bitcoin back up above the 20,000 level, for so long-- maybe not so long, but over the last few months, we've been seeing this correlation with risk-- risk assets in the equity space. Are we starting to see a bit of a break there?

BEN LAIDLER: Yes, it's beginning to break down. I mean, Bitcoin was the second-best performing asset in the world last quarter. It was the only asset along with the dollar that was up. Now, that may be shocking to some people, but that reflects two things. That reflects that it's a completely washed-out asset class that did very badly in the first half, and all the tourists have essentially left. And two, I think it reflects volatility picking up in all the other asset classes and [AUDIO OUT]. So I think it's a very interesting technical situation.

AKIKO FUJITA: OK. We'll continue to watch. Ben, as always, good to have you on. Ben Laidler, eToro global markets strategist.