Get over it! Rising crude is good for you: analyst

By Herbert Lash - Analysis

NEW YORK (Reuters) - Surging oil prices have often sent stock markets tumbling this year when, according to one view, investors should embrace rising energy costs because they boost the bottom line of many large-cap U.S. companies.

The energy sector is now the largest earnings contributor to the Standard & Poor's 500 Index .SPX, Wall Street's benchmark for corporate America's profitability, said David Bianco, head of U.S. equity strategy at investment bank UBS in New York.

Many investors see the rise in crude prices as a negative because of its potential impact on economic growth and the wallets of American consumers. That view, however, is mistaken because consumer discretionary spending only accounts for 15 percent of S&P 500 earnings, he said.

"We believe that high oil prices are a net positive to S&P earnings," Bianco told the Reuters Investment Outlook Summit in New York this week. "We are of high conviction that very high oil prices are more 'weatherable' for, not just the earnings but the market, than very low oil prices," he said.

The reaction to oil could be seen on Thursday when the S&P 500 and Dow Jones industrial average .DJI both rallied on an almost $5 drop in the price of crude. The rally later lost steam when oil surged anew to close higher at $136.74, in sight of last week's all-time closing high of $138.54.

Bianco acknowledged that many of UBS's clients believe that a sizable decline in oil prices would be a net positive for both stock prices and earnings, a view he takes issue with.

Investors fail to understand that there is a difference between the economy and corporate earnings, or as Bianco likes to say, growth in gross domestic product is not the same as S&P earnings growth.

"People think about the consumer all the time when it comes to the U.S. economy," Bianco said. "Their perception is the consumer is stretched and consumer spending will weaken with these high oil prices. Yet they don't appreciate that high commodity prices are actually very good for the S&P."

Business investment drives about a quarter of S&P profits while energy accounts for another 15 percent, Bianco said. High energy costs will lead businesses and people around the world to cut those costs, which will help large U.S. corporations, especially those that sell energy efficiency, he said.

Even though Americans might be up in arms about paying more than $4 for a gallon of gasoline, rising crude prices will not trigger a spike in inflation, especially if labor costs remain under control, which is now the case, Bianco said.

"We don't see inflation as being a problem," said Bianco.

To be sure, Bianco said if crude prices were to top $150 a barrel and stay there, that would jeopardize his outlook for corporate earnings and his 12-month target of 1,650 for the S&P 500. The benchmark index was trading near 1,350 on Friday.

Abby Joseph Cohen, Goldman Sach's senior investment strategist, told the Reuters Investment Outlook Summit that the cost of labor, whose related costs make up about two-thirds of business expense, typically drive U.S. inflation.

"If you take a look at those data, they are not particularly disturbing at this point with regard to inflation or inflationary consequences," Cohen said.

Nevertheless, it is still hard to shake the view among many investors that energy prices that remain high for a long time will not take a bite out of the consumer -- and the economy.