Soaring oil prices usually boost the S&P 500. Why that might not be the case this time around, according to Bank of America

• Oil prices have rocketed to multiyear highs, but that's unlikely to benefit S&P 500 earnings as much as they used to, says Bank of America.
• One factor serving as a tailwind is oil exploration companies have tightened spending.

Oil prices have jumped to multiyear highs and such moves tend to bolster S&P 500 index, but budget tightening by US oil companies and other factors are dulling the boost that the latest crude spike can have on the benchmark.

That conclusion comes from Bank of America in a research note Friday.

"Historically, higher oil prices have translated to higher earnings for the S&P 500, especially following the shale revolution in the US," Savita Subramanian, head of US equity and quantitative strategy at Bank of America, said in the note.

But the shrinking size of energy beneficiaries in the S&P 500 and capital discipline by oil explorers and producers stand to undercut the positive impact of surging oil prices on the index, the investment bank said.

Every 10% rise in oil prices used to translate into a 5% increase to S&P 500 per-share earnings, in part as it lead to increased capital expenditures that helped oil-services companies. Oil prices this year have surged as easing COVID restrictions boosted energy demand, contributing to a supply deficit.

West Texas Intermediate crude oil futures have climbed more than 70% this year to trade at seven-year highs, above $83 per barrel. Brent oil, the international benchmark, has reached three-year highs, gaining roughly 65% in 2021 to top $85 per barrel. The investment bank's commodities team projects Brent prices to rise above $100 a barrel if low stockpiles and a rebound in air travel collide with a cold winter.

But the last time oil was above $100 a barrel, back in 2014, the landscape was much different and no longer has the same trickle-down effect.

"Back then, oil beneficiaries (Energy, select Industrials, Chemicals) represented 20%+ of total S&P 500 earnings," BofA said. "Today, that number is just 6%."

Also, oil E&P's have tightened capital discipline, with the number of active oil rigs remaining more than 50% below the prior peak.

With oil at $80 per barrel, BofA's oil services analysts expect a roughly 22% increase in capex at E&Ps in 2022, but that's still 23% below 2018 levels.

"This translates to less revenue for energy capex beneficiaries and a lower earnings multiplier from higher oil. Energy earnings will also be driven mostly by higher prices, rather than price + volume," said BofA.