The Energy sector will be a focus sector for the market over the next few days, as Chevron reported actual results earlier today and Exxon Mobil is scheduled to report actual results on January 31. Overall, the S&P 500 Energy sector is reporting a year-over-year decline in earnings of 82% for 2016. Is it unusual for a sector to report an earnings decline of this magnitude for an entire year? Where does this decline rank in recent history?
The answer to the first question is, yes. Since 2008, a sector has reported a year-over-year decline in earnings of more than 50% only four times. The most recent annual earnings decline in excess of 50% occurred last year (2015), when the Energy sector reported a year-over-year decline in earnings of 60%. The largest year-over-year annual earnings decline occurred in 2008, when the Financials sector reported a year-over-year earnings decline of 112%. Thus, the Energy sector in 2016 is currently on pace to report the second-largest annual earnings decline of any sector since 2008.
However, it is interesting to note that analysts are projecting a significant rebound in earnings for the Energy sector in 2017. The projected earnings growth rate for the sector for 2017 is 496%. What is driving the unusually high projected growth rate for the sector for this year?
The large growth rate predicted for the Energy sector in 2017 is due to a combination of higher expected oil prices in 2017 and easier comparisons to the weak earnings of 2016. In terms of oil prices, analysts believe the average price of oil ($/bbl.) will increase by 27% year-over-year (to $55.19 from $43.04). In terms of earnings, analysts in aggregate believe the sector will earn approximately $46.8 billion in 2017, compared to earnings of $7.9 billion in 2016. While $46.8 billion is significantly below the earnings reported by the sector prior to 2015, it does reflect substantial year-over-year growth relative to the weak base-year earnings in 2016.