Energy May Lead the S&P 500 Lower in 2023


  • The vitality sector helped to help the S&P 500 earnings estimates in 2022
  • With oil down sharply, the vitality sector isn’t doubtless going to have the ability to save earnings in 2023
  • This means earnings estimates in all probability nonetheless have decrease revisions coming

earnings for 2023 are more likely to come beneath stress as the economic system slows, whether or not there’s a recession or not. Slowing nominal progress and decrease shall be sufficient to drive earnings decrease in 2023.  

On prime of that, the one sector that saved the S&P 500’s earnings in 2022 was the vitality sector (NYSE:). That isn’t more likely to repeat itself in 2023 until one thing adjustments meaningfully with the route of oil. Over time the vitality sector gross sales and earnings estimates comply with adjustments in the worth of oil. Oil is down loads because it peaked in 2022.

The Energy Sector Saves 2022

In 2022, the 12-month ahead earnings estimate for the vitality sector rose dramatically. This vital improve in the vitality sector earnings outlook was an enormous motive why S&P 500 earnings total remained robust and are nonetheless anticipated to point out some progress over the subsequent twelve months.   

However, throughout previous years, gross sales and earnings progress in the vitality sector has been pushed by adjustments in the worth of . However, oil costs have fallen considerably since peaking at over $120 in June. Earnings and gross sales estimates for vitality peaked in the center of September and have began to comply with oil and the worth decrease. So until oil costs begin heading larger quickly, the vitality sector’s outlook will doubtless deteriorate additional in 2023.

Without the energy sector providing a tailwind to S&P 500 earnings next year, one can wonder which sectors could help boost the overall market in 2023. There are few at this point because utilities seem to be the leader, and having a defensive sector like the utilities leading the S&P 500 earnings doesn’t leave one feeling good about the prospects of the market as a whole.

New Leadership In 2023

This suggests that market leadership in 2023 will not be found in a sector rising but in a sector falling, and at this point, consumer discretionary (NYSE:) is leading the charge, followed by healthcare. There has yet to be a big washout in technology earnings.

S&P 500 Sector EPS

This will matter mightily heading into 2023 because technology represents the largest sector in the S&P 500 at almost 26%, healthcare represents 16%, financials represent 11.5%, and consumer discretionaries represents about 10% of the index. So if these estimates continue to trend lower, it is likely to weigh further on the overall negative bias of the index earnings.

This leaves investors overpaying for the S&P 500, which currently trades for around 16.6 times 12-month forward earnings estimates. Going back to 1990, the average PE ratio for the S&P is about 16.4. Given the uncertainty heading into 2023 around slowing economic growth and a Fed with a very tight monetary policy, paying an average PE ratio seems too high, forgetting everything else that goes into determining where the PE ratio should be.

S&P 500 Best P/E Ratio

For 2023 not to be worse than 2022, there will need to be new leadership that comes to the surface to help support S&P 500 earnings estimates, and at this point, there have been none to go to the surface, which probably means we haven’t seen the lows in the stock market just yet, and the worst may be yet to come.

Disclosure: The author does not own any of the securities mentioned in this article.

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