Energy-related exchange traded funds could continue to underperform as big oil companies are expected to be the largest drag on earnings this upcoming season.
The Energy Select Sector SPDR (NYSEArca: XLE), which tracks the S&P Energy Select Sector Index, fell 2.8% so far this year and declined 10% over the past year. [At Least Energy ETFS Have Dividends Going For Them]
Weighing on the energy sector, the U.S. Dollar Index, a gauge of the dollar against a basket of major currencies, has increased 8% so far this year and crude oil prices have plunged another 15%, reports Wallace Witkowski for MarketWatch.
With the combination of a strong dollar and weak energy prices, S&P energy companies that rely on international sales will experience a double whammy.
According to FactSet findings, the energy component will weigh heavily on overall S&P 500 earnings this season.
Specifically, S&P 500 companies with over 50% of sales in the U.S. is expected to experience flat earnings first quarter earnings season, the overall S&P 500 index could see a 4.8% earnings decline and S&P 500 companies with over 50% of sales in the U.S., or large overseas presence, could see earnings plunge 11.6%.
However, when FactSet removed the energy sector from the equation, S&P 500 ex-energy with over 50% U.S. sales could see earnings rise 5.9%, the index ex-energy could see a 3.1% earnings growth and S&P 500 companies ex-energy with over 50% sales outside the U.S. could see a 1.3% earnings decline.
Consequently, the wide disparity between the earnings forecast of the overall S&P 500 and the index ex-energy suggests that the energy sector will play a heavy negative role on the overall earnings season ahead. Additionally, with the forecast broken down between companies with large U.S. and overseas sales, the earnings projection indicates that the energy sector relies on a significant portion of overseas sales, which will be hampered by a strong U.S. dollar. [New Fracking Standards Could Weigh On Energy ETF Growth]
Energy Select Sector SPDR
For more information on the energy sector, visit our energy category.
Max Chen contributed to this article.