The most recent oil bear market turned the energy sector into a burden in terms of S&P 500 earnings, but as oil output declines and prices rise, that burden is being lifted. In fact, energy sector and exchange traded funds such as the Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy ETF, could see their holdings deliver upside earnings surprises.
Energy companies were largest contributor to the earnings decline for the S&P 500 in the third quarter, the stabilizing crude oil prices and potential production cutbacks from major oil producers could help support sector-related exchange traded funds.
Oil services ETFs, such as the VanEck Vectors Oil Service ETF (NYSEArca: OIH) and the SPDR Oil & Gas Equipment & Services ETF (NYSEArca: XES), have also been solid performers and have earnings upside surprise potential.
That earnings drag is evaporating as S&P 500 energy earnings are expected to be only slightly negative for the fourth quarter and offer significant upside potential moving forward in 2017.
“Spurred by an improving outlook for global demand and an agreement to cut oil production from OPEC and non-OPEC producers, analyst optimism for energy earnings jumped the most on record over the New Year. This has made the shares inexpensive on a price-to-earnings basis,” reports Dani Burger for Bloomberg.