On the surface, 2015 earnings growth for S&P 500 stocks was disappointing, but digging into those numbers shows the real problem: an “energy deficiency.”

What we mean is that oil and gas had an exceptionally large impact on the S&P’s earnings and revenue. So far, the general benefit from lower oil has been small, while the direct impact of lower oil prices on energy company revenues has been severe.

If the negative impact of the energy shortfall were excluded, forward earnings for the S&P 500 would be at an all-time high.

Skeptics will claim that this kind of analysis is flawed and argue that a positive number can always be squeezed out of data if the bad numbers are excluded. We are not making the adjustment so that past results look better; rather, we believe that the adjustment provides a more accurate forecast. Mathematically, oil company profits have become a smaller part of the earnings mix, so oil’s future impact should be significantly reduced.

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Until recently, U.S. consumers did not change their spending habits very much in response to the drop in gasoline prices, but instead saved that money. Fortunately, though, purse strings were loosened slightly during the past holiday shopping season.

Now, with oil prices staying lower for longer than was initially believed possible, households should become increasingly confident about spending their energy windfall. Reflecting this change in consumer confidence Wall Street earnings estimates (excluding energy) call for a significant improvement from last year’s lackluster results.

PRICE/EARNINGS DISTORTIONS

Stock market bears have also been pointing to the 15 to 20 percent premium in the S&P 500’s forward price/earnings ratio as dangerously high and a reason to be negative.

Once again, energy stocks are distorting the calculation. Oil and gas stock prices are down substantially, but not nearly as much as the decline in underlying earnings. The result has been some sky-high price/earnings multiples. We note that this phenomenon is not uncommon in highly cyclical industries. Investors know that downturns do not last forever, and they factor in some level of profit improvement down the road. The high multiples of the index simply reflect the abysmal state of oil and gas company earnings, which is not reflective of the entire stock market.

Our figures show that, aside from oil, slightly less than a quarter of the S&P’s companies are selling at rich valuations, over 20 times next year’s estimated earnings. Importantly, more than a third of these companies are selling at or below the market’s long-term average of 14.5 times next year’s earnings.

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More stocks were down than up during 2015, but over 150 stocks were down more than 20 percent over the past 52 weeks through February 26, 2016. There are many more reasonably priced stocks within the S&P 500 than the relatively high multiple of the overall index would imply.

Investors may be overly focused on the negatives and ignoring the positives. Of course, the sharp decline in the Chinese stock market has been one of the major reasons behind the recent volatility in stock prices around the world.

The offset is that inflation and interest rates should stay contained, as the commodity markets struggle with overcapacity built up to serve what they thought would be an unending Chinese boom. The U.S. economy is relatively self-contained, so it should be fairly insulated from events in China as long as economic growth there only slows.

If U.S. consumers finally accept the idea that lower gasoline prices are here to stay for a while and start spending more, investors may focus on the positives here, rather than on the negatives in the oil patch and China.

This article is not intended as investment, legal, accounting or tax advice. Any opinions, recommendations or indications of past performance contained in this article may be subject to risks and uncertainties beyond the control of Hallmark Capital Management, Inc. (Hallmark) and are no guarantee of future returns. Hallmark does not guarantee or certify the accuracy, completeness, or timeliness of the information presented in this article. Hallmark is an investment advisor registered with the U.S. Securities and Exchange Commission. Registration with the SEC does not imply that Hallmark or any individual providing investment advisory services on behalf of Hallmark possesses a certain level of skill or training. © Hallmark Capital Management, Inc. All rights reserved.

This article was originally published in the April/May 2016 issue of Worth.