Wall St. Week Ahead – Recession Fears Challenge Energy Stocks After Stellar Year

The S&P 500 energy sector is up 4.2% year-to-date, slightly behind the growth for the broad index. The sector jumped 59% in 2022, an otherwise brutal year for stocks that saw the S&P 500 decline 19.4%.

Energy bulls argue that the sector’s valuations strengthen the case for a third-straight year of profit, which would be the first such feat for the group since 2013. Goldman Sachs, RBC Capital Markets and UBS Global Wealth Management are among the Wall Street firms recommending the energy. stock.

Despite last year’s run, the sector trades at a forward price-to-earnings ratio of 10 times, compared with 17 times for the broader market, and many of its stocks offer strong dividend yields. The potential rewards for shareholders were highlighted this week when Chevron shares rose nearly 5% after announcing plans to buy back shares worth $75 billion.

However, some investors worry that energy companies may find it difficult to grow profits in 2022 after a huge rally, especially if the widely anticipated US economic recession affects commodity prices.

“It looks like the group is holding up well, but there is some jitteriness due to the fact that investors are concerned about the economic downturn and what it will do to demand,” said Robert Pavlik, senior portfolio manager at Dakota Wealth. “

He said he is also slightly overweight in the energy sector, including shares of Chevron and Pioneer Natural Resources.

Economists and analysts polled by Reuters forecast US crude to average $84.84 a barrel in 2023, compared with an average price of $94.33 last year, citing expectations of global economic weakness. US crude oil prices were recently hovering around $80 a barrel.

At the same time, many investors increased their holdings of energy stocks in 2022 after years of avoiding the sector, which often underperformed the broader market amid concerns such as poor capital allocation by companies and uncertainties over the future of fossil fuels. The sector’s weighting in the S&P 500 roughly doubled over the past year to 5.2%.

However, Aaron Dunn, co-head of the value equity team at Eaton Vance, said this dynamic may be coming to an end.

“People are back in energy in a big way,” he said. “We had that tailwind over the last few years, which was that everybody was investing less in energy. I don’t think that’s the case now.”

And while energy companies are expected to deliver strong quarterly reports in the coming weeks after a roaring 2022, those numbers may have set a high bar for this year.

Energy’s fourth-quarter earnings are expected to climb 60% from a year earlier and 155% for the full year 2022, according to Refintiv IBES, which has reported 30% of the 23 companies in the sector so far. But earnings are expected to decline 15% this year, the biggest decline among 11 S&P 500 sectors.

Exxon Mobil and ConocoPhillips are among the reports due next week, when investors will also focus on the Federal Reserve’s latest policy meeting.

“Last year was a banner year,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.

Meanwhile, bullish investors point to shareholder-friendly uses of cash by the companies.

According to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, the energy sector’s 3.43% dividend yield through year-end 2022 was nearly twice the level of the index as a whole. Energy companies executed $22 billion in share buybacks in the third quarter, which was slightly more than 10% of all S&P 500 buybacks.

“From a total return perspective, that’s where I think energy can still continue to differentiate itself from the broader market,” said Noah Barrett, energy and utilities sector research lead at Janus Henderson Investors.

However, others believe that more value may exist in areas of the market that were beaten down last year. Eaton Vance’s Dunn said stocks in sectors such as consumer discretionary and industrials could appear more attractive.

“Energy is probably going to be okay this year, but I think you’ve got a lot of areas in the market that have underperformed where we’re finding excellent opportunities,” he said.

The text of this story is published from a wire agency feed without any modification.