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Energy saved US markets last quarter. Now the sector is losing power

New York (CNN Business)US markets took a beating on Thursday as big bank earnings delivered disappointing results.
Markets and the economy have endured three turbulent months. The Federal Reserve's rate rise regime and Russia's invasion of Ukraine have slammed investor and borrower sentiment. The financial sector is hurting, too. Analysts expect earnings to fall by more than 22% this year—more than any other sector.
"I'm concerned, the numbers were worse than we thought," said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. The financial sector is one of the best barometers for the rest of the earnings season, he added.
Still, analysts think S&P 500 (INX) earnings will be in the green — even after the index posted its worst quarter since the start of 2020.
The analyst consensus is that earnings will grow by about 5.7% this quarter, even though about six of the 11 sectors that make up the S&P 500 are expected to report declines in earnings per share.
That's because the S&P 500 has a small but mighty hero: the energy sector.
See here: Energy earnings are expected to grow by well over 200% this quarter, nearly tripling their profits from a year ago, according to Wells Fargo estimates.
Energy stocks make up just 4.2% of the overall S&P 500, said Silverblatt, but if you remove them from the mix earnings across the index would likely fall by about 2% this quarter.
While war in the Ukraine and the related unpredictability hurt almost all sectors of the market, oil benefitted.
"The gains in energy follow a 'barbell' motif -- there's strength on both ends," wrote Sam Stovall of CFRA.
On the upstream side, West Texas Intermediate oil, the US benchmark, averaged almost $109 per barrel in the second quarter, up 65% year-over-year. On the other end, wallet-busting gas prices at the pump gave consumer-facing companies like Exxon a boost.
This single-sector heroism isn't unheard of during economic downturns.
In the second quarter of 2020, Big Tech did the heavy lifting.
Alphabet, Amazon, Apple and Facebook (now Meta) earned more than $28 billion combined. The positive earnings pushed the total value of the companies above $5 trillion, nearly a fifth of the entire S&P 500.
But this time around, things are a bit different. The tech sector makes up about 30% of the S&P 500 and exerts much more influence than energy's 4% slice.
"Revisions have been phenomenal for the energy sector," said Matt Stucky, senior portfolio manager at Northwestern Mutual Wealth Management Company. "But it's just such a small piece of the market that if you have a mild slowdown, energy is not going to be able to act as a ballast." The energy sector typically performs poorly during recessions, he added. "It's not something you can depend on."
The energy sector has already lost much of its superhero status.
Oil prices have fallen precipitously as investors worry that expected Fed rate hikes this month could lower oil demand. US West Texas Intermediate crude was at $95.02 a barrel on Thursday. Energy stocks, tracked by the Energy Select Sector SPDR ETF, have fallen about 18% this month.
So while "the natural inclination for investors during choppy market environments is to concentrate their portfolio in what's working and sell what isn't, that's the opposite of what you should do," said Stucky.
Instead, he recommends that investors "increase diversity, be disciplined and rebalance frequently. It's painful. But on the other side of a recession asset classes that have gotten punished do rebound."
Jul 17, 2022 11:42
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