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The Wall Street sign outside the New York Stock Exchange in New York City, New York, USA, October 2, 2020. REUTERS/Carlo Allegri
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The Wall Street sign outside the New York Stock Exchange in New York City, New York, USA, October 2, 2020. REUTERS/Carlo Allegri
Even though valuations are still viewed as relatively cheap, a potential US recession and a stark comparison to stellar earnings in 2022 weigh heavily on the outlook for energy stocks to boost last year’s phenomenal rally. I’m leaning against it.
The S&P 500 energy sector is up 4.2% year-to-date, slightly lagging the gains of the broader index. This sector will see him climb 59% in 2022.
Energy bulls have argued that the sector’s valuations support the possibility of a third straight year of gains, which would be the group’s first since 2013. stock.
Despite last year’s rally, the sector is trading at 10x expected price/earnings versus the general market’s 17x, and many of its stocks offer stable dividend yields. The potential benefits for shareholders were underscored this week when Chevron’s shares rose nearly 5% after announcing plans to buy $75 billion worth of stock.
But some investors say it will be difficult for energy companies to boost profits after seeing a big rally in 2022, especially if the widely-anticipated US recession hits commodity prices. I am concerned that it may become
“The group appears to be holding up well, but there is some trepidation from the fact that investors are concerned about the economic slowdown and its impact on demand,” said Robert Publik, senior portfolio manager at Dakota Wealth. there is,” he said.
He said he has a modest overweight in the energy sector, which includes Chevron and Pioneer Natural Resources.
Economists and analysts in a Reuters poll forecast U.S. crude CLc1 to average $84.84 a barrel in 2023, averaging $94.33 last year, citing expectations of global economic weakness. I’m here. US oil prices were recently around $80 a barrel.
At the same time, many investors have for years shunned the energy sector, which has often underperformed the broader market amid concerns such as poor capital allocation by companies and uncertainty about the future of fossil fuels. Later, in 2022, it strengthened its holdings in energy stocks. The sector’s weight in the S&P 500 nearly doubled to 5.2% last year.
But Aaron Dunn, co-head of Eaton Vance’s value equities team, said the momentum may be waning.
“People have come back to energy in a big way,” he said. “In the last few years, we had a tailwind. It was that everyone wasn’t investing enough in energy. I don’t think that’s the case anymore.”
Energy companies are also expected to deliver strong quarterly reports over the coming weeks after a strong 2022, but those numbers may be setting their sights high for this year. .
According to Refintiv IBES, with 30% of the 23 companies in the sector reporting so far, energy’s fourth quarter earnings are expected to grow 60% year over year and 155% for the full year 2022. However, earnings are expected to fall 15% this year, the biggest decline among the 11 sectors in the S&P 500.
Exxon Mobil and ConocoPhillips are among reports scheduled for next week when investors will also look to the Federal Reserve’s latest policy meeting.
“Last year was a breakthrough year,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management. think”
Meanwhile, bullish investors point to companies’ use of shareholder-friendly cash.
At year-end 2022, the energy sector’s dividend yield of 3.43% was almost double the level of the entire index, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. The energy company executed $22 billion in share buybacks in the third quarter, slightly more than his 10% of all buybacks in the S&P 500.
Noah Barrett, Head of Research, Energy and Utilities Division, Janus Henderson Investors, said:
However, some believe there may be more value in areas of the market that were beaten last year. Eaton Vance’s Dunn said stocks in sectors such as consumer discretionary and industrials may look more attractive.
“Energy will probably do well this year, but there are many areas in the market that have fared very poorly and I think we see great opportunities.
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