Investors still haven't priced in the impact on stocks of higher-for-longer oil prices as OPEC+ embarks on production cuts, Bank of America says

• The market isn't pricing in the higher-for-longer environment in oil prices, Bank of America said Monday.
• Oil prices look set to increase following the decision by OPEC+ to cut production.

The planned production increase by OPEC and its allies will push up oil prices, but pressure from elevated prices on corporate earnings is not yet reflected in market expectations, according to Bank of America.

OPEC and other crude producers this month agreed to cut production targets by 2 million barrels a day starting in November, a move that will contribute to a higher-for-longer environment for oil prices, said Bank of America.

The investment bank sees Brent crude averaging $100 a barrel in 2023 and West Texas Intermediate crude at $94 a barrel. It also recently set a 12-month target on Brent crude at $110. On Monday, Brent traded at around $92.30 a barrel, and WTI was at $84.40 per barrel.

"Higher gasoline prices mean higher inflation, which implies more margin pressure next year across multiple sectors - something the market isn't pricing in," analysts led by Thomas Thornton wrote in a research note published Monday.

The investment bank's equity strategists foresee earnings growth at S&P 500 companies declining by 9% to $200 a share in 2023, compared with the consensus estimate for growth of 8% to $240 per share.

"[While] Wall Street analysts have moderated their optimism for margin expectations, record margins are still penciled in for 2H2023," said Thornton. He also noted that BofA's Corporate Misery Indicator, a macro indicator for the profit environment, remains well off its highs.

"We believe this is overly optimistic, especially as demand starts to weaken, which was the main driver of pricing power post-COVID. Sticky wage inflation, especially when pricing power and demand are expected to slow will be a major headwind to corporate margins, in our view."

BofA noted that market expectations are for the S&P 500's Consumer Discretionary group to see the biggest earnings growth among sectors next year – at 35% year over year despite its negative correlation to energy prices and labor intensity. BofA sees the biggest risk in that sector.

The bank maintained its underperform rating on Dollar General, Dollar Tree, and National Vision, saying those retailers are the most exposed to the impact of rising gas prices on lower-income customers.