NEW YORK, Oct 31 (Reuters) – Strong earnings are helping energy stocks extend this year’s torrid run, sharpening their contrast to tech-focused megacaps whose disappointing results have hurt their stocks.
Standing out all year, the energy sector of the S&P 500 (.SPNY) is up 26% in October alone, compared to an increase of 8% for the entire S&P 500 (.SPX). Oil majors Exxon Mobil (XOM.N) and Chevron (CVX.N) are up about 29% and 27% for the month, respectively, with oil services company Halliburton (HAL.N) jumping 47%.
Over the year, the energy sector soared by nearly 65%. It’s the only one of 11 S&P 500 sectors in positive territory so far in 2022, with the broader index down around 19%, and heavy stocks such as Amazon (AMZN.O) and Tesla ( TSLA.O) pounded as Federal Reserve rate hikes crush asset prices.
“The reason they rallied … is earnings have been really, really strong,” said King Lip, chief strategist at Baker Avenue Asset Management in San Francisco. There’s “a lot of momentum in this space, and a lot of people are rushing towards what works.”
According to Refinitiv IBES, energy companies in the S&P 500 are on track to increase their earnings by 135% in the third quarter compared to the year-ago period. Overall S&P 500 earnings are expected to have risen only 4%. Indeed, excluding the energy contribution, S&P 500 earnings are expected to have fallen 3.5% in the quarter, according to IBES.
The sector’s earnings power was on full display last Friday, when both Exxon and Chevron released results that shattered estimates.
Chevron reported net income of $11.2 billion, nearly double the $6.1 billion in the same period last year. Exxon’s third-quarter net profit of $19.66 billion nearly matched the $20.7 billion of Apple (AAPL.O), the largest U.S. company by market value.
In contrast, last week, companies that weigh heavily in stock indices, including Amazon, Google’s parent Alphabet (GOOGL.O) and Facebook’s parent Meta Platforms (META.O) released results that disappointed investors badly. .
Energy companies are benefiting from higher oil and gas prices, with US crude prices up 16% so far this year.
Companies are also exercising discipline on costs and capital spending, said Paul Nolte, portfolio manager at Kingsview Investment Management.
“If money follows earnings, then it at least makes sense that the sector continues to do well,” Nolte said.
With its recent gains, the S&P energy sector was approaching its June high, which was the highest the sector has reached since 2014.
Due to its outperformance this year, the 23-component sector now represents about 5.3% of the weight of the S&P 500, almost twice as much as at the end of 2021.
Despite rising this year, oil prices are well below their early 2022 highs, and another jolt could push corporate stocks even further, Nolte said.
But Lip said after a strong 2022, companies may struggle to top earnings performance in the coming quarters. Indeed, profits in the energy sector are expected to fall by 11.5% in 2023, according to IBES data.
“The way Wall Street works is to ‘show me the money’ in terms of earnings growth, and you’re just not going to see that in energy companies going forward,” Lip said. “It’s just much more difficult compositions.”
Reporting by Lewis Krauskopf Editing by Nick Zieminski
Our standards: The Thomson Reuters Trust Principles.