The corporate earnings season is in full swing, but it does not look rosy for the energy sector and related exchange traded funds.
The Energy Select Sector SPDR Fund (NYSEArca: XLE) has already been underperforming the broader market as it dipped 4.6% so far in the new year, compared to the S&P 500’s 3.1% gain.
The poor performance reflects traders’ expectations of a weak earnings season for the sector. According to FactSet data, analysts predict corporate profits for the 28 oil and gas firms in S&P 500 energy group will plunge nearly 43% for the last three months of 2019 year-over-year, the Wall Street Journal reports.
In comparison, the broader S&P 500 is expected to see fourth-quarter profits contract 2.3% year-over-year.
If we excluded energy names from the index, corporate profits across the 10 other S&P 500 sectors are projected to expand 0.2%.
The poor corporate results out of the energy sector is not anything new. Energy names have exhibited poor profits for several quarters due to oscillating crude oil prices that make year-end comparisons hard to hit.
For instance, Halliburton Co. reported underwhelming bottom-line results year-over-year due to a slowdown in shale drilling. Other energy companies that could report disappointing year-over-year declines in earnings include, Phillips 66, which reports next week, and Exxon Mobil Corp., which is scheduled for next month.
However, analysts are hopeful that the fourth quarter could mark the end of this bearish trend. Market watchers believe earnings in the energy sector could recover in the first quarter this year simply because they are working with a low bar to clear in terms of year-over-year comparisons.
FactSet projects energy companies could report their biggest growth in earnings for the first three months of the year. The rebound could help lift a beleaguered sector that has suffered through a multi-year slump, with S&P 500 energy stocks down almost 24% over the past five years.
For more information on the energy sector, visit our energy category.