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What to Expect When Energy Earnings Roll In

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The Energy Select Sector SPDR (NYSEArca: XLE). XLE, the largest equity-based energy exchange traded fund, is higher by 17.40% this year, but that showing lags those of non-equity oil ETFs. XLE and rival equity-based energy funds will be tested when first-quarter earnings start rolling in.

However, those reports could bring some bright spots for the energy sector, the eighth-largest sector weight in the S&P 500.

“At the sector level, the Energy (+13.5%) and Health Care (+11.7%), sectors are expected to see the largest price increases, as these sectors had the largest upside differences between the bottom-up target price and the closing price on April 4,” according to FactSet.

XLE tracks the Energy Select Sector Index. Starting April 22 and running through May 3, over 83% of that index reports first-quarter earnings, meaning plenty of earnings tests are imminent for XLE.

What’s Next for Energy

“If we take a look at how analyst earnings estimates are trending across sectors, it’s clear that energy is the real rising star,” said State Street in a recent note. “1-month changes to the analyst estimates of 2019 earnings per share (EPS) are most prevalent for energy companies. These energy earnings upgrades have largely been a result of oil prices ballooning up to $60 per barrel.”

The energy sector was one of the worst-performing groups in the S&P 500 in 2018, as highlighted by an annual decline of 18.20% for XLE. With oil prices needing positive catalysts, the ability of OPEC to lower output is critical for the commodity’s near-term fortunes. Likewise, some market observers are concerned about U.S. shale producers keeping output high as prices decline.

“It’s important to note that these energy earnings estimates are coming off a very low bottom, and that earnings growth over the remainder of the year for this sector is still projected to be negative,” according to State Street. “Where we think we might see some more earnings upside is in health care, as the positive earnings sentiment around that sector has been more consistent.”

Dow components Exxon Mobil Corp. (NYSE: XOM) and Chevron Corp. (NYSE: CVX) combine for 41.60% of XLE’s weight.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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