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As Price of Oil Falls, Are Analysts Too Optimistic on Energy Earnings for 2019?

Companies and Earnings

By John Butters  |  November 26, 2018

As of today, the Energy sector is projected to report the highest earnings growth of all 11 sectors in the S&P 500 in 2019 at 24.3%. This sector also currently has the highest percentage of Buy ratings (63%) of all 11 sectors in the index and is projected to see the largest increase in price (+28.9%) over the next 12 months (based on the bottom-up target price). Based on these estimates, industry analysts are clearly optimistic on the Energy sector.

The forward 12-month EPS estimate for the S&P 500 Energy sector has increased by 6.5% since September 30, which is the largest increase of all 11 sectors in the S&P 500. However, it should be noted that forward earnings estimates for the Energy sector and the price of oil are highly correlated. Over the past 20 years, the correlation coefficient between the daily forward 12-month EPS estimate for the Energy sector and the daily price of oil (WTI) is 0.92 (where 1.0 is a perfect positive linear relationship). 

SP500 Energy Forward 12 month EPS vs Price of Oil

The Movement In the Price of Oil and the Forward 12-Month EPS Estimate

Since September 30, the price of oil (WTI) has declined by 25.4% (to $54.63 from $73.25).  Due to this decrease in price, there is now a dichotomy between the movement in the price of oil and the forward 12-month EPS estimate. Assuming the 20-year correlation still holds, then either the price of oil will see a rebound in price soon, or analysts will reduce their forward EPS estimates for companies in the Energy sector.

SP 500 Energy Forward 12-Month EPS vs Price of Oil 1 year revised

While the forward 12-month EPS estimate for the Energy sector has seen the largest increase to date of all 11 sectors since September 30, the price of the sector as seen the third largest decrease of all 11 sectors over this period at -13.4% (to $485.82 from 560.91). As a result, the forward 12-month P/E ratio for the S&P 500 is now 13.7, which is well below the five-year average (28.5) and 10-year average (20.0) for the sector. As the stock market is generally considered a forward-looking indicator, this decrease in price may imply a reduction in earnings estimates is considered more probable by the market than a rebound in the price of oil.

On the other hand, the estimated average price of oil for 2019 (based on 31 estimates submitted to FactSet) is currently $68.90. This estimate is slightly above the estimate of $68.20 on September 30. Even with the recent decrease in price, analysts have maintained their expectations for average oil prices for 2019, which would imply an expected rebound in the price of oil from the current price of $54.63.

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John Butters

Senior Earnings Analyst

John’s weekly research report, Earnings Insight provides analysis and commentary on trends in corporate earnings data for the S&P 500, including revisions to estimates, year-over-year growth, performance relative to expectations, and valuations. He is a widely used source for the media and has appeared on CNBC, Fox Business News, and the Business News Network. In addition, he has been cited by numerous print and online publications such as The Wall Street Journal, Financial Times, The New York Times, MarketWatch, and Yahoo! Finance.

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