Energy Pumps Up Q3 Earnings Growth
“Please God, give me one more oil boom. I promise not to blow it next time.”
That’s the bumper sticker message I saw a few years back, when I was visiting Austin, Texas to attend a music festival. It made me laugh, but it also conveys wisdom about this volatile sector.
The energy sector, known for its extreme boom-bust cycles, is booming again. Perhaps this time, the industry won’t blow it, at least not too soon. This earnings season, we’re discovering just how important energy’s fortunes are to the S&P 500’s overall performance.
Energy’s disproportionate contribution…
For the third quarter of 2022, with 91% of S&P 500 companies reporting actual results, the blended year-over-year earnings growth rate is 2.2%. Among companies that have reported, 69% have reported a positive earnings surprise and 71% have reported a positive revenue surprise.
Corporate earnings ostensibly have held their own, but there’s an important caveat you need to recognize: the energy sector is disproportionately skewing the results to the positive side. If this sector were excluded from the all-sector tally, the S&P 500 would be reporting a decline in earnings of 5.3% rather than growth in earnings of 2.2%.
The energy sector has, by far, reported the highest year-over-year earnings growth of all 11 S&P 500 sectors, at 137.3%. Higher year-over-year oil prices contributed to the spectacular earnings growth for the sector. The average per-barrel price of oil in Q3 2022 ($91.43) was 30% above the average price for oil in Q3 2021 ($70.52).
Not surprisingly, the energy sector has vastly outperformed the other 10 sectors (see chart).
It’s true that the energy sector is at an inflection point, as fossil fuels increasingly give way to renewable energy sources such as wind and solar. Big Oil will never regain the dominance it once enjoyed in the 20th century. But oil and gas will remain vital commodities into the foreseeable future.
Despite the big run-up in energy equity prices this year, you can still find bargains in beaten-down subsectors such as master limited partnerships (MLPs).
MLP price performance is not as sensitive to interest rate movements and/or inflation as commonly perceived. While sudden spikes in interest rates have caused declines in MLP price performance, historically over the long haul there has been only a slight correlation between MLP price performance and U.S. 10-year Treasury yields.
The benchmark 10-year Treasury yield has declined more than 30 basis points over the last week as inflation numbers come in much cooler than expected. Oil prices have been volatile, moving up or down based on economic reports and geopolitical developments, but the per-barrel price has been range-bound hovering around $85/bbl.
News out of China has directly affected oil prices. The country’s slowing economy and strict COVID policies have weighed on crude, although in recent days, Beijing’s easing of those curbs has provided a tailwind for expected energy demand and hence oil prices.
On Thursday, the major U.S. stock market indices closed in negative territory, largely due to hawkish comments in the morning by St. Louis Federal Reserve President James Bullard. The final tally:
- DJIA: -0.02%
- S&P 500: -0.31%
- NASDAQ: -0.35%
- Russell 2000: -0.76%
As Q3 earnings results continue to come in, we’ll see if the energy boom and the stock market rally have momentum. The latest report on leading economic indicators, scheduled for release this Friday, will provide important clues. Regardless, volatility is here to stay.
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Jim Fink is chief investment strategist of Options for Income, Velocity Trader, and Jim Fink’s Inner Circle. Jim’s investment methods have enabled him to take his life’s savings of $50,000, turn the amount into $5 million, and retire early at age 37.
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John Persinos is the editorial director of Investing Daily. You can reach John at: email@example.com