The downtrodden energy sector, the seventh-largest sector weight in the S&P 500, has a chance to resume its bullish ways this week amid an avalanche of third-quarter earnings reports from some of the group’s marquee names.
Energy stocks, including the titans that reside in popular exchange traded funds such as the Energy Select Sector SPDR (NYSEArca: XLE), have the potential to deliver some upside surprises if for no other reason than that analysts’ estimates for the sectors profits have been pared considerably in recent months.
“Profit growth expectations for S&P 500 energy companies have fallen more than any other sector – from a forecast of 13.8 percent on July 1 to the current 1.8 percent,” reports Caroline Valetkevitch for Reuters.
Amid a third-quarter plunge in oil prices, one that has lingered into the current quarter with the United States Oil Fund (NYSEArca: USO) shedding almost 12% in the past month, XLE, its constituents and rival energy ETFs have been stung.
XLE, the largest equity-based energy ETF, is off 7.2%, but the fund has perked up in recent sessions, gaining 2.5% over the past 10 days. That after losing 9.5% in the third quarter. [Murky View on Energy ETFs]
The sector’s recent woes have made it inexpensive relative to the broader market. Energy’s “price-to-earnings multiple is among the lowest for S&P 500 sectors, at 14.3 times estimates earnings,” according to Reuters.
This week, five of XLE’s top-10 holdings report third-quarter results. That quintet includes Dow components Exxon Mobil (NYSE: XOM) and Chevron (NYSE: CVX) along with ConocoPhillips (NYSE: COP), the largest U.S. independent oil and gas producer. That trio combines for over 37% of XLE’s weight.
Earlier this month, Estimize data showed investors were expecting the energy sector to deliver the best EPS growth, but the worst revenue growth among the S&P 500 sectors.
Professional investors appear to be displaying concern about the chances of upside earnings surprises by the energy sector. From Oct. 17 through Oct. 23, nearly $966 million was pulled from XLE.The bulk of those outflows were seen late last week because as of Oct. 21, XLE had pulled in almost $1.1 billion this month, making it one of the top-10 ETFs for fourth-quarter inflows and by far the best sector ETF by that metric. [Buying the Energy ETF Pullback]
Energy Select Sector SPDR
