The energy sector, which was the biggest drag on the earnings growth picture over the past two years, appears to make a strong comeback for the first time after eight quarters of declines. This is especially true as total earnings for the sector are expected to be up 8.5% from the same period last year, as per the latest Earnings Preview. In fact, energy is the third largest contributor to the S&P 500 earnings growth, trailing finance and consumer staples.
Strong momentum has built up in the space especially after the historic OPEC output cut deal that sent the oil prices higher, giving a new lease of life to energy stocks. Oil prices logged in the biggest annual gain in 2016 since the financial crisis, with Brent and WTI rising 52% and 45%, respectively (read: 4 Top Performing Energy ETFs & Stocks of 2016 ).
As a result, the ultra-popular ETFs Energy Select Sector SPDR XLE , Vanguard Energy ETF VDE , iShares U.S. Energy ETF IYE and Fidelity MSCI Energy Index ETF FENY soared 43.2%, 44.6%, 40.4% and 42.3%, respectively, over the trailing one-year period. The bullish trend is likely to continue given that earnings surprises are in store with year-over-year growth for most of the energy companies.
Let's delve into the earnings picture of the three oil biggies - Exxon Mobil XOM , Chevron CVX and ConocoPhillips COP - that dominate the above-mentioned funds' portfolio and have the power to move the funds up or down in the coming days. These firms collectively make up for 39.9% for IYE, 38.9% for VDE, 38.7% for FENY and 33.9% for XLE.
According to the our surprise prediction methodology, stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) and a positive Earnings ESP are likely to beat earnings estimates, while a Zacks Rank #4 or 5 (Sell rated) are best avoided.
You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .
What's in the Cards?
Exxon Mobil is slated to release earnings before the market opens on January 31. It has a Zacks Rank #3 (Hold) and an Earnings ESP of -2.82%, indicating lower chances of beating estimates this quarter. The stock saw a negative earnings estimate revision of a nickel over the past 90 days for the to-be-reported quarter and delivered negative earnings surprises of 6.83% on average over the last four quarters. However, its earnings are expected to grow 5.47%. Though the stock has solid Value Style Score of B, Growth and Momentum Style Score of D each looks ugly.
Chevron, which trails Exxon Mobil, has a Zacks Rank #3 and an Earnings ESP of +4.62%, indicating higher chances of beating estimates. The company is expected to see massive earnings growth of 308.87% year over year for the to-be-reported quarter. However, it delivered average negative earnings surprises of 41.20% in the last four quarters and witnessed a negative earnings estimate revision of six cents over the past 90 days. Further, the stock has an unfavorable Value, Growth and Momentum Style Score of C, F and F, respectively. The company is expected to report before the opening bell on January 27 (see: all the energy ETFs here ).
ConocoPhillips has a Zacks Rank #3 and an Earnings ESP of +2.63%, indicating higher chances of beating estimates. Like its peers, its earnings are expected to grow 57.41% year over year in the fourth quarter. However, the earnings surprise track over the past four quarters is not good, with a negative average surprise of 13.12%. ConocoPhillips also witnessed negative earnings estimate revision with the Zacks Consensus Estimate for fourth-quarter 2016 deteriorating from a loss of 27 cents to a loss of 38 cents cents over the past three months. The stock has an unfavorable Value, Growth and Momentum Style Score of D, F and F, respectively. The company will report before the opening bell on February 2.
Energy ETFs are poised for a surge as Q4 unfolds given hidden earnings surprises and expected earnings growth. Additionally, the historic deal would stabilize the oil market pushing up oil prices further. Further, improving demand/supply balances, an improving domestic economy and better economic conditions in China added to the strength (read: 17 Power-Packed ETFs for 2017 ).
If these weren't enough, the above-mentioned ETFs have a Zacks ETF Rank #3, suggesting that the worst is over for the space and that these will continue to perform well heading into the earnings season.
Want key ETF info delivered straight to your inbox?
Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.