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Wall Street Week Ahead Recession fears pose challenge to energy shares after stellar year

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NEW YORK (Reuters) – The prospect of a U.S. recession and a stark comparison to 2022’s stellar performance have pushed energy stocks to last year’s staggering numbers, even as valuations remain relatively cheap. The prospects that will support a strong rise are weighing on the outlook.

S&P 500 Energy Sector (.SPNY) is up 4.2% year-to-date, slightly lagging the gains of the broader index. (.SPX)The sector will record a 59% surge in 2022. It was a tough year for the stock as the S&P 500 fell 19.4% for him.

Energy bulls argue that the sector’s valuations support the possibility of a third straight year of gains, which would be the group’s first since 2013. stock.

Despite last year’s rally, the sector is trading at 10x expected price/earnings versus the general market’s 17x, and many of its stocks offer stable dividend yields.Chevron Highlights Potential Benefits For Shareholders This Week (CVX.N) Shares rose nearly 5% after announcing plans to buy back $75 billion worth of shares.

But some investors say it will be difficult for energy companies to boost profits after seeing a big rally in 2022, especially if the widely-anticipated US recession hits commodity prices. I am concerned that it may become

“The group appears to be holding up well, but there is some trepidation from the fact that investors are concerned about the economic slowdown and its impact on demand,” said Robert Publik, senior portfolio manager at Dakota Wealth. there is,” he said.

He said he has a slight overweight in energy divisions such as Chevron and Pioneer Natural Resources. (PXD.N).

Two-Year Comparison of the Energy Sector and the S&P 500

Economists and analysts in a Reuters poll, citing expectations of a weak global economy, expect U.S. oil prices to average $84.84 a barrel in 2023, compared with last year’s average price of $94.33. doing. US oil prices were recently around $80 a barrel.

At the same time, many investors have for years shunned the energy sector, which has often underperformed the broader market amid concerns such as poor capital allocation by companies and uncertainty about the future of fossil fuels. Later, in 2022, it strengthened its holdings in energy stocks. The sector’s weight in the S&P 500 nearly doubled to 5.2% last year.

But Aaron Dunn, co-head of Eaton Vance’s value equities team, said the momentum may be waning.

“People have come back to energy in a big way,” he said. “In the last few years, we had a tailwind. It was that everyone wasn’t investing enough in energy. I don’t think that’s the case anymore.”

Energy sector presence in the US stock market

Energy companies are also expected to deliver strong quarterly reports over the coming weeks after a strong 2022, but those numbers may be setting their sights high for this year. .

According to Refintiv IBES, with 30% of the 23 companies in the sector reporting so far, energy’s fourth quarter earnings are expected to grow 60% year over year and 155% for the full year 2022. However, earnings are expected to fall 15% this year, the biggest decline among the 11 sectors in the S&P 500.

exxon mobil (XOM.N) and ConocoPhillips (COP.N) Investors will also be keeping an eye on the Federal Reserve’s latest policy meeting.

“Last year was a breakthrough year. rice field.

Meanwhile, bullish investors point to companies’ use of shareholder-friendly cash.

At year-end 2022, the energy sector’s dividend yield of 3.43% was almost double the level of the entire index, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. The energy company executed $22 billion in share buybacks in the third quarter, slightly more than his 10% of all buybacks in the S&P 500.

Noah Barrett, Head of Research, Energy and Utilities, Janus Henderson Investors, said:

However, some believe there may be more value in areas of the market that were beaten last year. Eaton Vance’s Dunn said stocks in sectors such as consumer discretionary and industrials may look more attractive.

“Energy will probably do well this year, but there are many areas in the market that have fared very poorly and I think we see great opportunities.

Reported by Louis Krauskopf. Editing by Ira Iosebashvili

Our criteria: Thomson Reuters Trust Principles.

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