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Crude oil prices appear to be reversing last week’s losses, but prices are down significantly from the year-earlier level. There are multiple factors at play in the commodity’s price action, including supply-demand fundamentals to OPEC action, the Ukraine war, the exchange value of the U.S. dollar, and even seasonality.
Worries about oil demand trends stemming from an uncertain outlook for the U.S. economy and a less-than-robust post-Covid momentum in China appear to be the main reasons for the commodity’s recent weakness. But given constrained crude oil exploration spending trends, particularly outside of the OPEC countries, the commodity’s long-term supply fundamentals indicate higher-for-longer oil prices going forward.
The pandemic was tough on the oil patch, with the immediate aftermath of Covid lockdowns pushing oil futures into negative territory. But the rebound was equally impressive. You can see this in the chart below that shows the Zacks Energy sector’s quarterly earnings in billion dollars.
Image Source: Zacks Investment Research
As you can see above, the Zacks Energy sector is on track to bring in $42 billion in earnings in 2023 Q1, up from $36.5 billion in the year-earlier period but down significantly from the recent ‘peak earnings’ of $65.4 billion in 2022 Q2.
You can also see in the above chart that the group lost money in the 2020 Q2 and Q3 periods as a result of Covid lockdowns.
Keep in mind that the Energy patch was struggling on the earnings front even in the pre-Covid period, as we can see in the chart below illustrating the group’s profitability on an annual basis.
Image Source: Zacks Investment Research
What this chart is telling us is that the Zacks Energy sector is currently expected to bring in $158.4 billion in earnings this year, down from $210 billion in 2022.
This year’s $158.4 billion is a significant decline from last year’s $210 billion tally, but it is still the all-time second-highest earnings tally for the group, second only to the 2022 record.
You can see in the chart below that the group’s previous record of $127.5 billion in 2008, when oil prices went above $140 per barrel, is not only below the 2023 level but also below what is currently expected for the next two years.
Image Source: Zacks Investment Research
A big reason for the group’s improved profitability picture in the current cycle is the enhanced efficiencies that oil producers were forced to achieve in the 2005 to 2019 period.
Regular readers of our earnings commentary know that the Energy sector was one of only a handful that enjoyed positive estimate revisions in 2022, even as estimates for most of the other sectors were coming down. This trend reversed around last Fall when the oil prices shifted course.
Chevron is currently expected to earn $14.39 per share in 2023. This is down from $14.56 per share at the end of March 2023 and $17.53 per share at the end of September 2022, as the chart below shows
Image Source: Zacks Investment Research
The corresponding revisions chart for Exxon and BP isn’t as stark as what you can see above with Chevron, as it has long been seen as the ‘oilier’ of the ‘super majors.’
Exxon, Chevron, and the broader Energy space were all standout stock market performers in 2022 but have struggled this year as the revisions trend has reversed. Below is a chart illustrating the year-to-date performance of Exxon and Chevron shares, with the S&P 500’s performance also blended in.
Image Source: Zacks Investment Research
The sustainability of the group’s stock market performance will be determined by how enduring current commodity-price trends turn out to be.
These stocks don’t need spiking oil prices; they need stable prices instead. Greater confidence in the forward price curve will keep the revisions trend stable, which should help these stocks reverse their recent underperformance.
It is hard to accurately forecast the near-term outlook for the U.S. and global economy, which drives oil’s demand function. But we know from history that down economic cycles are followed by rebounds and growth. Given the sub-par spending trends on oil exploration at present, particularly outside of the OPEC region, it is reasonable to envision a very tight supply-demand balance once current macroeconomic clouds lift.
Q1 Earnings Season Scorecard
Including all the quarterly reports that came out through Monday morning, May 8th, we now have Q1 earnings from 430 S&P 500 members, or 86% of the index’s total membership. Total earnings for these companies are down -3.7% from the same period last year on +4.6% higher revenues, with 77.4% beating EPS estimates and 74.9% beating revenue estimates.
The proportion of these companies beating both EPS and revenue estimates is 62.3%.
Regular readers of our earnings commentary know that we have been referring to the overall picture emerging from the Q1 earnings season as good enough; not great, but not bad either. With results from more than half of the S&P 500 members already out, we can confidently say that corporate earnings aren’t headed towards the ‘cliff’ that market bears were warning us of.
The way we see it, the ‘better-than-feared’ view of the Q1 earnings season at this stage may be a bit unfair, given how resilient corporate profitability has turned out to be. But the view isn’t entirely off the mark either.
Below, we compare the Q1 results thus far from what we have seen from this same group of 90 index members in other recent periods.
The first set of charts compares the earnings and revenue growth rates for the index members that have reported with what we had seen from the group in other recent quarters.
Image Source: Zacks Investment Research
The comparison charts below put the Q1 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
To get a sense of what is currently expected, take a look at the chart below that shows current earnings and revenue growth expectations for the S&P 500 index for 2023 Q1 and the following three quarters.
Image Source: Zacks Investment Research
As you can see here, 2023 Q1 earnings are expected to be down -4.3% on +4.2% higher revenues. This would follow the -5.4% earnings decline in the preceding period (2022 Q4) on +5.9% higher revenues.
Embedded in these 2023 Q1 earnings and revenue growth projections is the expectation of continued margin pressures, which has been a recurring theme in recent quarters. The favorable surprise in the Q1 reporting cycle has been on the margins front, which have come out to be better than what the market was factoring in ahead of the start of this reporting cycle.
Image Source: Zacks Investment Research
A big part of the margin turnaround is taking place in the Tech sector, as you can see in the chart below.
Image Source: Zacks Investment Research
On the revisions front, there is a notable sign of stabilization lately, with estimates not falling as much as would have normally been expected, given the overall sentiment about the macro backdrop.
We see this favorable revisions trend for the current period (2023 Q2) as well as for full year 2023.
The chart below shows the earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Analyzing the Q1 Earnings Landscape
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Q1 Earnings: Energy Sector in Focus
Crude oil prices appear to be reversing last week’s losses, but prices are down significantly from the year-earlier level. There are multiple factors at play in the commodity’s price action, including supply-demand fundamentals to OPEC action, the Ukraine war, the exchange value of the U.S. dollar, and even seasonality.
Worries about oil demand trends stemming from an uncertain outlook for the U.S. economy and a less-than-robust post-Covid momentum in China appear to be the main reasons for the commodity’s recent weakness. But given constrained crude oil exploration spending trends, particularly outside of the OPEC countries, the commodity’s long-term supply fundamentals indicate higher-for-longer oil prices going forward.
The pandemic was tough on the oil patch, with the immediate aftermath of Covid lockdowns pushing oil futures into negative territory. But the rebound was equally impressive. You can see this in the chart below that shows the Zacks Energy sector’s quarterly earnings in billion dollars.
Image Source: Zacks Investment Research
As you can see above, the Zacks Energy sector is on track to bring in $42 billion in earnings in 2023 Q1, up from $36.5 billion in the year-earlier period but down significantly from the recent ‘peak earnings’ of $65.4 billion in 2022 Q2.
You can also see in the above chart that the group lost money in the 2020 Q2 and Q3 periods as a result of Covid lockdowns.
Keep in mind that the Energy patch was struggling on the earnings front even in the pre-Covid period, as we can see in the chart below illustrating the group’s profitability on an annual basis.
Image Source: Zacks Investment Research
What this chart is telling us is that the Zacks Energy sector is currently expected to bring in $158.4 billion in earnings this year, down from $210 billion in 2022.
This year’s $158.4 billion is a significant decline from last year’s $210 billion tally, but it is still the all-time second-highest earnings tally for the group, second only to the 2022 record.
You can see in the chart below that the group’s previous record of $127.5 billion in 2008, when oil prices went above $140 per barrel, is not only below the 2023 level but also below what is currently expected for the next two years.
Image Source: Zacks Investment Research
A big reason for the group’s improved profitability picture in the current cycle is the enhanced efficiencies that oil producers were forced to achieve in the 2005 to 2019 period.
Regular readers of our earnings commentary know that the Energy sector was one of only a handful that enjoyed positive estimate revisions in 2022, even as estimates for most of the other sectors were coming down. This trend reversed around last Fall when the oil prices shifted course.
You can see this in the revisions trend for the oil majors like Exxon (XOM - Free Report) , Chevron (CVX - Free Report) , BP (BP - Free Report) , and others.
Chevron is currently expected to earn $14.39 per share in 2023. This is down from $14.56 per share at the end of March 2023 and $17.53 per share at the end of September 2022, as the chart below shows
Image Source: Zacks Investment Research
The corresponding revisions chart for Exxon and BP isn’t as stark as what you can see above with Chevron, as it has long been seen as the ‘oilier’ of the ‘super majors.’
Exxon, Chevron, and the broader Energy space were all standout stock market performers in 2022 but have struggled this year as the revisions trend has reversed. Below is a chart illustrating the year-to-date performance of Exxon and Chevron shares, with the S&P 500’s performance also blended in.
Image Source: Zacks Investment Research
The sustainability of the group’s stock market performance will be determined by how enduring current commodity-price trends turn out to be.
These stocks don’t need spiking oil prices; they need stable prices instead. Greater confidence in the forward price curve will keep the revisions trend stable, which should help these stocks reverse their recent underperformance.
It is hard to accurately forecast the near-term outlook for the U.S. and global economy, which drives oil’s demand function. But we know from history that down economic cycles are followed by rebounds and growth. Given the sub-par spending trends on oil exploration at present, particularly outside of the OPEC region, it is reasonable to envision a very tight supply-demand balance once current macroeconomic clouds lift.
Q1 Earnings Season Scorecard
Including all the quarterly reports that came out through Monday morning, May 8th, we now have Q1 earnings from 430 S&P 500 members, or 86% of the index’s total membership. Total earnings for these companies are down -3.7% from the same period last year on +4.6% higher revenues, with 77.4% beating EPS estimates and 74.9% beating revenue estimates.
The proportion of these companies beating both EPS and revenue estimates is 62.3%.
Regular readers of our earnings commentary know that we have been referring to the overall picture emerging from the Q1 earnings season as good enough; not great, but not bad either. With results from more than half of the S&P 500 members already out, we can confidently say that corporate earnings aren’t headed towards the ‘cliff’ that market bears were warning us of.
The way we see it, the ‘better-than-feared’ view of the Q1 earnings season at this stage may be a bit unfair, given how resilient corporate profitability has turned out to be. But the view isn’t entirely off the mark either.
Below, we compare the Q1 results thus far from what we have seen from this same group of 90 index members in other recent periods.
The first set of charts compares the earnings and revenue growth rates for the index members that have reported with what we had seen from the group in other recent quarters.
Image Source: Zacks Investment Research
The comparison charts below put the Q1 EPS and revenue beats percentages in a historical context.
Image Source: Zacks Investment Research
The Earnings Big Picture
To get a sense of what is currently expected, take a look at the chart below that shows current earnings and revenue growth expectations for the S&P 500 index for 2023 Q1 and the following three quarters.
Image Source: Zacks Investment Research
As you can see here, 2023 Q1 earnings are expected to be down -4.3% on +4.2% higher revenues. This would follow the -5.4% earnings decline in the preceding period (2022 Q4) on +5.9% higher revenues.
Embedded in these 2023 Q1 earnings and revenue growth projections is the expectation of continued margin pressures, which has been a recurring theme in recent quarters. The favorable surprise in the Q1 reporting cycle has been on the margins front, which have come out to be better than what the market was factoring in ahead of the start of this reporting cycle.
Image Source: Zacks Investment Research
A big part of the margin turnaround is taking place in the Tech sector, as you can see in the chart below.
Image Source: Zacks Investment Research
On the revisions front, there is a notable sign of stabilization lately, with estimates not falling as much as would have normally been expected, given the overall sentiment about the macro backdrop.
We see this favorable revisions trend for the current period (2023 Q2) as well as for full year 2023.
The chart below shows the earnings and revenue growth picture on an annual basis.
Image Source: Zacks Investment Research
For a detailed look at the overall earnings picture, including expectations for the coming periods, please check out our weekly Earnings Trends report >>>>Analyzing the Q1 Earnings Landscape