A potential U.S. recession and tough comparisons to a stellar 2022 are weighing on the prospects of energy stocks delivering an encore to last year’s stunning run, despite valuations that are seen as still comparatively cheap.
forecast U.S. crude would average $84.84 per barrel in 2023, compared to an average price of $94.33 last year, citing expectations of global economic weakness. U.S. crude prices recently stood at around $80 per barrel.
At the same time, many investors beefed up their holdings of energy stocks in 2022 after years of avoiding the sector, which had often underperformed the broader market amid concerns such as poor capital allocation by companies and uncertainties over the future of fossil fuel. The sector’s weight in the S&P 500 roughly doubled last year to 5.2%.
However, that dynamic may be petering out, said Aaron Dunn, co-head of the value equity team at Eaton Vance. "People have come back to energy in a big way," he said. "We had that tailwind the last couple of years, which was that everyone was under-invested in energy. I don’t think that’s the case anymore."And while energy companies are expected to deliver strong quarterly reports over the coming weeks after a roaring 2022, those numbers may have set a high bar for this year.
With 30% of the sector's 23 companies reported so far, energy's fourth-quarter earnings are expected to have climbed 60% from a year earlier, and 155% for full-year 2022, according to Refintiv IBES. But earnings are expected to decline 15% this year, the biggest drop among the 11 S&P 500 sectors.
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