Rig hands work at a Knox Energy Inc. oil drilling site in Knox County, Ohio. U.S. oil drillers laid down 61 rigs last week, the most since February 1991, Baker Hughes Inc. data show. Photographer: Ty Wright/Bloomberg

(Bloomberg) — While stock investors wait for the benefits of cheaper oil to seep into the economy, all they can see lately is downside.

Forecasts for first-quarter profits in the Standard & Poor’s 500 Index have fallen by 6.4 percentage points from three months ago, the biggest decrease since 2009, according to more than 6,000 analyst estimates compiled by Bloomberg. Reductions spread across nine of 10 industry groups and energy companies saw the biggest cut.

Earnings pessimism is growing just as the best three-year rally since the technology boom pushed equity valuations to the highest level since 2010. At the same time, volatility has surged in the American stock market as oil’s 56 percent drop since June to below $47 a barrel raises speculation that companies will cancel investment and credit markets and banks will suffer from debt defaults.

“Either there is nothing to worry about and crude is going quickly back to $70 plus, or we have entered an earnings down cycle for an appreciable portion of the market,” said Michael Shaoul, who helps oversee $10 billion as chief executive officer of Marketfield Asset Management in New York. “I don’t see much room for a middle ground and I don’t think the winners will cancel out the losers.”

Energy Drag

American companies are facing the weakest back-to-back quarterly earnings expansions since 2009 as energy wipes out more than half the growth and the benefit to retailers and shippers fails to catch up. Oil producers face a combination of faltering demand and booming supplies from North American shale fields, with crude sinking to $46.07 a barrel from an average $98.61 in the first three months of 2014.

The S&P 500 slipped 0.8 percent at 4 p.m. in New York, extending its first back-to-back weekly retreat since October, as crude continued its decline.

Profit is forecast to have grown 2 percent in the final three months of 2014 and increase 2.8 percent for the current quarter, down from analysts’ October estimates of 8.1 percent and 9.2 percent, respectively. Without energy companies, profit gains would have been 4.7 percent and 7.8 percent, the most recent projections show.

Except for utilities, every other industry has seen reductions in estimates. Profit from energy producers such as Irving, Texas-based Exxon Mobil Corp. and Chevron Corp. in San Ramon, California, will plunge 35 percent this quarter, analysts estimated. In October, analysts expected the industry to earn about the same as it did a year ago.

‘Not Convinced’

“My initial thought was oil would take a dollar or two off the overall S&P 500 earnings but that obviously might be worse now,” Dan Greenhaus, the New York-based chief strategist at BTIG LLC, said in a phone interview. “The whole thing has moved much more rapidly and farther than anyone thought. People were only taking into account consumer spending and there was a sense that falling energy is ubiquitously positive for the U.S. but I’m not convinced.”

Alcoa Inc. will start the earnings season today, with companies including JPMorgan Chase & Co. Schlumberger Ltd. and Intel Corp. scheduled to follow the aluminum producer and announce financial results later this week.

One big market risk from lower oil is the prospect that it will freeze energy-related capital spending, according to Savita Subramanian and Dan Suzuki, strategists at Bank of America Corp. Earnings in the S&P 500 may be as much as $6 a share lower than analysts forecast this year should oil stay below $50 a barrel, they estimate.

ConocoPhillips, based in Houston, and Continental Resources Inc. from Oklahoma City are among energy producers that reduced their 2015 spending plans in December. The industry accounts for a third of all capital spending in the S&P 500, according to Deutsche Bank AG.

‘Flow Through’

The cut “will flow through to the drillers and the service part of the industry, and it could affect employment numbers going into the next quarter,” Tom Sudyka, president of Lawson Kroeker Investment Management in Omaha, Nebraska, said in a phone interview. His firm oversees about $500 million. “As much as you hear that oil is so positive for the consumer, there will be negative effects,” he said. “The market will get more worried the longer this goes on.”

U.S. oil drillers laid down 61 rigs last week, the most since February 1991, Baker Hughes Inc. data show. Contract drillers Helmerich & Payne Inc. and Pioneer Energy Services Corp. both said this month that they’ve had clients pay early-termination fees to end agreements for rigs.

The drag is spreading to other industries. U.S. Steel Corp. the country’s second-biggest producer of the metal, said last week that it plans to lay off more than 750 employees at two pipe plants to cope with lower investments.

Machinery Makers

Caterpillar Inc. is likely to provide a lower 2015 forecast than expected when it reports fourth-quarter earnings as the Peoria, Illinois-based company faces slowing sales of compressors and pumps to the oil industry, Sameer Rathod, an analyst at Macquarie Group Ltd. said in a Dec. 16 note.

Along with Caterpillar, Terex Corp. and United Rentals Inc. are the three machinery companies that have the most to lose from the slide in energy prices, David Raso, an analyst with Evercore ISI, said in a report last week.

While cheaper oil is a boon to stores and restaurants, their gains haven’t materialized enough to make up for the lost profit from energy. About 35 percent of the S&P 500’s earnings come from global investment and commodity spending while discretionary consumption contributes a fifth, according to a November estimate from Deutsche Bank.

Slower Benefit

David Kostin, Goldman Sachs Group Inc.’s chief U.S. equity strategist, sees the benefit from lower energy prices eventually filtering through. Every drop of $10 a barrel lifts earnings by $2 a share, he said in a Jan. 5 note.

“Energy analysts can rapidly assess the negative impact of falling oil prices on their companies whereas other analysts, in the consumer area for example, aren’t able just yet to assess how much their companies benefit,” Ed Yardeni, chief investment strategist of Yardeni Research Inc. in Brookville, New York, said in a phone interview. “There is no reason why it wouldn’t be at least a zero-sum situation where energy companies’ loss is other companies’ gain.”

Crude’s biggest slump since the 2008 financial crisis is stirring anxiety in stocks and the credit market, where energy debt soared during the commodity boom. Yields on junk-rated energy bonds have risen to an average 9.5 percent from 5.7 percent in June when prices for West Texas Intermediate peaked around $107 a barrel, according to Bank of America Merrill Lynch index data.

Credit Pressures

Regional banks lifted by the shale renaissance, such as BOK Financial Corp. and Comerica Inc. now face potential credit pressures in loans related to the industry, Fitch Ratings said last month, adding that oil prices below $50 a barrel would likely trigger a jump in credit losses.

Daily swings in the S&P 500 have been almost 50 percent higher since OPEC declined to trim output to ease a global oil-supply glut. The index has moved 0.76 percent daily since the Nov. 27 announcement, up from the 0.51 percent fluctuations in 2014 up until that point.

With valuations rising and earnings pessimism growing, the bull market is heading for more swings as it approaches the seventh year, according to Scott Clemons, the chief investment strategist at Brown Brothers Harriman Private Banking. After rising more than 10 percent for a third straight year in 2014, the index traded at 18.5 times earnings in December, 13 percent high than its 10-year average.

“The market is prone to over-react,” Clemons said by phone from New York. His firm oversees $26.5 billion. “Earnings growth is waning. Valuations are pretty lofty. We’re in for a more volatile year for 2015, whether it’s energy uncertainty or geopolitics.”

To contact the reporter on this story: Lu Wang in New York at lwang8@bloomberg.net

To contact the editors responsible for this story: Jeff Sutherland at jsutherlan13@bloomberg.net