Energy Crushed the S&P 500 in 2022 and Wall Street Still Loves the Sector in 2023

Energy stocks were the biggest gainers this year in a bleak year for equities.

And Wall Street is betting that the sector’s outperformance will continue into the new year.

Even as the price of oil falls back from this year’s highs, energy stocks appear poised to move higher on relatively low valuations and earnings expectations that appear to be a bright spot in the otherwise bleak outlook for S&P 500 earnings estimates.

“The bottom line is that if you think about the earnings of the S&P 500 as a whole, even with subdued earnings expectations for next year, energy will account for 9% of the index’s earnings and only 5% of the weighting in the S&P 500,” Evercore ISI Senior Managing Director Julian Emanuel told Yahoo Finance Live in an interview.

“And if you look at valuations in the energy sector in general, they’re already discounting the recession multiple times, while the rest of the S&P 500 hasn’t fully discounted yet.”

Analysts have cut their earnings per share forecasts for 2023 throughout the year, with downward revisions to 9 of the 11 sectors in the S&P 500 between Sept. 30 and Nov. 30, according to data from FactSet.

However, two industries saw an increase in their bottom-up EPS estimates over the period, led by a 4.4% revision of expectations for the energy sector. Estimates for utilities also rose 0.9% during the period.

Two sectors saw an increase in their bottom-up EPS estimate for CY 2023 between September 30 and November 30, led by the Energy sector (+4.4%).  (Source: FactSet)

Two sectors saw an increase in their bottom-up EPS estimate for CY 2023 between September 30 and November 30, led by the Energy sector (+4.4%). (Source: FactSet)

The upward changes in estimates for energy come even as the industry is poised for tough year-over-year comparisons in 2023, with revenue expected to fall -7.3% next year after a 2022 blowout, according to FactSet- data.

Energy was also the largest contributor to earnings growth for the S&P 500 this year. Excluding the 5.1% earnings growth in energy, the index would report a profit decline of -1.8%.

Strategists also point out that oil companies have been cautious despite this year’s rise in oil prices and optimism about continued higher prices.

CIBC Private Wealth US Sr. Energy Trader Rebecca Babin told Yahoo Finance Live that companies “don’t make hasty decisions about increasing production” based on fluctuations in oil prices.

“They have less influence,” Babin said. “They’re more disciplined and they’re super focused on getting back to cash.”

Not only is energy up nearly 55% year-to-date in 2022, but it also has no competition – the other 10 sectors in the S&P 500 are negative this year, while the broader benchmark index is down about 19% this year.

Shares of Exxon Mobil (XOM), the largest oil and gas company in the US, are up about 65% this year. Chevron (CVX), the second largest, is up more than 40% in 2022.

Meanwhile, Occidental Petroleum (OXY), a standout this year, more than doubled in shares as Warren Buffett’s Berkshire Hathaway increased its stake in the company during the year and now holds a 20.9% stake in the company .

Meanwhile, oil prices have already reversed their gains this year, after hitting a high of $120 a barrel in June. Supply and demand concerns related to rising interest rates, inflation, COVID lockdowns in China and the Russian war in Ukraine have all contributed to extreme volatility in energy this year.

While Wall Street has lowered its expectations for a price spike next year, strategists still largely expect oil to climb higher in 2023, especially on forecasts of increased demand as China reopens its economy after three years of COVID shutdowns.

Goldman Sachs economists said so last week the bank sees Brent crude – the international benchmark price – average $98 per barrel and WTI, the US benchmark price, at $92 per barrel. Earlier forecasts saw targets of $110 per barrel for Brent and $105 per barrel for WTI.

However, Emanuel argued that the comparison of energy stocks to oil prices is “misplaced”.

“Had it not been misplaced, we would never have bought another oil stock in 2020 when the price of WTI went negative,” said Emanuel.

Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc

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