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Energy ETFs Beat S&P 500 in 2022, More Gains Likely in 2023

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Energy stocks have been the biggest winners in 2022, which has been a dreary year for equities. The coronavirus vaccine rollout is gradually helping to control the spread of the outbreak across the globe. Factors like easing Omicron concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East have boosted oil prices this year.

Energy has also been the largest contributor to earnings growth for the S&P 500 this year. Barring energy's 5.1% earnings growth, the index would be set to report an earnings drop-off of -1.8%. Strategists also point out that oil companies have been prudent despite this year's surge in oil prices and optimism about persistently higher prices.

More Run Likely in 2023

Energy stocks have room to go higher, even after a successful run this year, says one strategist, as quoted on Yahoo Finance. "They're still cheap if you look at it on most metrics,” Tortoise portfolio manager Rob Thummel told Yahoo Finance. He also says the biggest driver for energy stocks going forward is the yield they offer investors.

In China, more cities are easing COVID-19-related restrictions, prompting expectations of increased demand in the world's top oil importer. Russian oil exports could decline by two million barrels per day by year-end 2023, The Fitch Group said, as quoted on CNBC. This, in turn, may boost oil prices higher.

Thanks to relatively cheap valuations and earnings expectations that appear to be a bright spot in an otherwise unattractive outlook for S&P 500, earnings estimates should go in favor of energy stocks and ETFs.

The Energy sector’s year-earlier profitability came in at $27.8 billion, which itself was a big jump from the third quarter of 2020 when it hardly made profits. But as we all know, the sector’s fortune took a big turn, with 2022 Q2 earnings coming in at $66.9 billion, and Q3 projected to jump 122.9% to $62.0 billion, per the Zacks Earnings Trends issued on Nov 30, 2022.

In the third quarter of 2022, energy grew 122.9% in earnings over a 50.7% uptick in revenues. For the fourth quarter, energy earnings are expected to grow 60.9% over 15.4% revenue gains. For the first quarter of 2023, energy earnings are expected to increase 29.7% over a 2.7% increase in revenues.

“The bottom line here is that when you think about the earnings of the S&P 500 as a whole, even with muted expectations for earnings next year, energy is going to represent 9% of the index's earnings and it's only 5% of the weighting in the S&P 500,” Evercore ISI Senior Managing Director Julian Emanuel told Yahoo Finance Live in an interview.

ETFs in Focus

Energy Select Sector SPDR Fund (XLE - Free Report) , Alerian MLP ETF (AMLP - Free Report) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP - Free Report) are some of the ETFs that should be under radar. These ETFs have a P/E of 16.64X, 13.21X and 13.25X, respectively. Yields are 3.75%, 7.99% and 2.91% for XLE, AMLP andXOP, respectively. In contrast, SPDR S&P 500 ETF Trust (SPY - Free Report) has P/E of 21.70X and yield 1.66%.

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