Strong earnings are helping energy stocks extend this year’s torrid run, furthering their contrast with the tech-focused megacaps whose disappointing results have battered their shares.
A standout all year, the S&P 500 energy sector is up 26 per cent in October alone, against an 8-per-cent rise for the overall S&P 500. Oil majors Exxon Mobil and Chevron are up roughly 29 per cent and 27 per cent for the month, respectively, with oil field services firm Halliburton jumping 47 per cent.
For the year, the energy sector has soared nearly 65 per cent. It’s the only one of 11 S&P 500 sectors in positive territory so far in 2022, with the broader index down about 19 per cent, and heavyweight stocks such as Amazon and Tesla pounded as Federal Reserve rate hikes clobber asset prices.
“The reason why they have been rallying … is earnings have been really, really strong,” said King Lip, chief strategist at Baker Avenue Asset Management in San Francisco. There is “a lot of momentum in that space, and a lot of people just rushing to what’s working.”
S&P 500 energy companies are on pace to have increased earnings by 135 per cent in the third quarter from the year-earlier period, according to Refinitiv IBES. Overall S&P 500 earnings are expected to have climbed just 4 per cent. Indeed, excluding energy’s contribution, S&P 500 earnings are set to have declined 3.5 per cent in the quarter, according to IBES.
The sector’s earnings power was on full display last Friday, when Exxon and Chevron both posted results that smashed estimates.
Chevron posted a net profit of US$11.2-billion, almost double the US$6.1-billion from the same period last year. Exxon’s US$19.66-billion third-quarter net profit was nearly as much as the US$20.7-billion for Apple, the largest U.S. company by market value.
By contrast last week, companies that have heavy weights in stock indexes, including Amazon, Google parent Alphabet and Facebook parent Meta Platforms posted results that soundly disappointed investors.
Energy companies are benefiting from rising oil and gas prices, with U.S. crude prices up 16 per cent so far this year.
Companies are also demonstrating cost and capital-spending discipline, said Paul Nolte, portfolio manager at Kingsview Investment Management.
“If money does follow earnings, then it makes sense at least that the sector continues to do well,” Mr. Nolte said.
With its recent gains, the S&P’s energy sector was approaching its June peak, which was the highest the sector has reached since 2014.
Because of its outperformance this year, the 23-component sector now makes up about 5.3 per cent of the weight of the S&P 500, nearly twice as much as at the end of 2021.
Despite their increase this year, oil prices are well off their highs from earlier in 2022, and another jolt up could drive shares of the companies even further, Mr. Nolte said.
But Mr. Lip said after a strong 2022, the firms may have trouble topping their earnings performance in future quarters. Indeed, energy sector earnings are expected to decline 11.5 per cent in 2023, according to IBES data.
“The way that Wall Street works is, ‘show me the money’ in terms of earnings growth, and you are just not going to see it in energy companies going forward,” Mr. Lip said. “It’s just a lot harder comps.”
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