Oct 14, 2022
VOT Research Desk
Market Analytics and Considerations
S&P 500 in View
Some investors are keeping their bullish views on energy stocks, one of the few bets that have performed well throughout a punishing year, in spite of the gut-wrenching volatility of the market and the attractive valuations.
The call is difficult. The S&P 500 energy sector is already up about 48% this year, and tightening monetary policy around the world has made it more likely that there will be a global recession, which could reduce demand for energy.
Nonetheless, despite significant gains in many energy stocks this year, signs that supply will remain relatively scarce are enticed some investors to remain invested in the sector. These investors are attracted by attractive earnings prospects and valuations that continue to be relatively low. The energy sector of the S&P 500 trades at a trailing price-to-earnings ratio of 9.9, which is less than half of the 17.4 that the broader index has.
As persistent inflation raises expectations for additional market-punishing rate hikes from the Federal Reserve and other central banks, few also see any end to the selloff in broader markets. This year, bonds are down nearly 18%, as measured by the Vanguard Total Bond Market index fund, while the S&P 500 is down around 24 percent.
It’s hard to see people giving up on energy because it’s the best of both worlds, we are referring to the sector’s low valuation and the potential for additional gains if supply remains tight. It’s a great place to hide if you’re worried about the market’s direction.
At the same time, as earnings season picks up in the coming weeks, only energy is expected to see positive revisions.
Energy companies are expected to see a 121% increase in earnings per share in the third quarter compared to the same period last year, while the broad index excluding energy companies is expected to see a 2.6% decline in earnings.
Exxon, one of the largest oil companies in the United States (NYSE: Chevron Corporation and Mobile Corp. (NYSE: XOM)On October 28, CVX) will release their earnings. Investors will be keeping an eye on Tesla’s earnings the following week (NASDAQ: Netflix, TSLA) Inc. (NASDAQ: Johnson & Johnson (NYSE: JNJ) and NFLXJNJ) and a few others.
Recent production cuts by OPEC+ and the European Union’s plans to abandon Russian crude by February have raised expectations for additional tightness in the oil market. After decreasing by nearly a third between the months of July and September, Brent crude prices reached $92 on Friday, an increase of nearly 10% from their most recent low.
Oil prices are expected to reach $101 in 2023, according to analysts at TD Securities, who wrote, “There is an outsized probability that crude prices can surge higher, particularly if demand concerns fail to materialize to the extent that some bears expect.”UBS Global Wealth Management analysts predict that oil will reach $110 by the end of the year.
If the global economy slows in response to monetary policy tightening from central banks, some fund managers continue to be skeptical that energy can maintain its outperformance.
It is growing existing overweight in dividend-paying tech businesses like Texas Instruments since the world is heading toward recession, which will hurt demand.
At the same time, the selloff in the S&P 500 is creating buying opportunities in consumer discretionary and large-cap tech stocks that are more appealing over the long run than energy. We’re starting to see opportunities that are harder to not take advantage of,
Others, on the other hand, think that the sector’s fundamentals are still in place and that there is more upside, despite recent gains, we believe fund managers will maintain a light position in energy shares. Additionally, she is betting that China’s economy will improve in the coming months, which will support.
