No Surpise About the Drag From This Sector

No Surprise About the Drag Energy Sector

It is already this year’s worst-performing sector in the S&P 500 by a wide margin, so it is not surprising that some investors expect energy to be a drag on S&P 500 earnings. For example, the Energy Select Sector SPDR (NYSEArca: XLE), the largest exchange traded fund dedicated to energy equities, is down about 15.7% year-to-date.

The challenge for energy equities is that some oil market observers see more declines coming for crude. Oil traders are concerned over how fast U.S. shale oil producers will increase production to capture the rising prices.

While OPEC is cutting back to alleviate price pressures, U.S. fracking companies could jump to capitalize on the windfall as crude oil prices jump back above $50 per barrel – according to some estimates, shale oil producers can get by with oil at just over $50 per barrel due to advancements in technology and drilling techniques that have helped cut down costs.

“Oil and oil stock prices are very closely correlated. Oil company earnings were supposed to rebound big-time this year and be the major contributor to earnings for the S&P 500, but with oil well below expectations, analysts have been aggressively taking down third quarter earnings estimates,” reports CNBC.

Valuation concerns for the energy sector come even as the sector is featured prominently in an array of value ETFs. However, the sector looks more like a value trap than a legitimate value play over the near-term.