Strong economic fundamentals and higher oil prices could bolster energy sector ETFs in the earnings season ahead.
The Energy Select Sector SPDR (NYSEArca: XLE), the largest equity-based energy exchange traded fund,has increased 13.1% over the past three months and was up 6.2% year-to-date. In comparison, the S&P 500 rose 6.5% over the past three months and was 4.3% higher so far this year.
“From an earnings standpoint, energy probably will grow earnings about 130 percent, and I didn’t misstate that: 130 percent,” PNC’s former global chief investment strategist, Bill Stone, said on CNBC. “You have to remember that oil went from a year ago less than 50 dollars a barrel to about 80 dollars a barrel” currently.
West Texas Intermediate crude oil futures were up 0.3% to $74.0 per barrel and Brent crude was 1.4% higher to $78.2 per barrel Monday.
Overall, Stone expects S&P 500 earnings to grow at 20% in the second quarter, and he believed that could help the stocks rally 10% from where they started the year.
Q2 2018 Could Be Second Highest Earnings Growth Since Q3 2010
According to FactSet, for the second quarter of 2018, the estimated earnings growth rate for the S&P 500 is 20.0% and if 20.0% is the actual growth rate for the quarter, it will mark the second highest earnings growth since Q3 2010 of 34.0%.
Five sectors have higher growth rates today, compared to the end of the first quarter, due to upward revisions to earnings-per-share estimates, with energy stocks leading the charge. The energy sector has recorded the largest increase in earnings estimates since the start of the quarter to 142.5% from 115.1%.
Related: 10 Sector ETFs for a Late Market Cycle
Among the list of concerns, Stone is watching geopolitical headlines closely, such as the ongoing trade war developments, but does not believe they will get out of hand.
“Right now, we’re nowhere near any sort of recession whether you’re talking in the U.S. or globally on the whole,” Stone added.
For more information on the energy sector, visit our energy category.