What is the energy sector?
It includes exploration, drilling and mining, refining and marketing, storage and transportation of oil, natural gas and coal.
While the price of oil is well above recent lows, the Energy sector continues to face heightened uncertainty due to the massive supply/demand imbalance perpetuated by the COVID-19-related economic shutdown. This paints a challenging fundamental backdrop for the sector, given questions as to when the oil market will rebalance.
However, oil production is being slashed quickly, putting less pressure on constrained storage capacity, and demand appears to be stabilizing as economies are reopening. Additionally, with relatively stronger balance sheets and access to cash, large energy companies are in a much better place than the entire oil patch, which is facing high insolvency risk.
We think that the S&P 500 Energy sector has put in a low, but it is far from clear how long it will take for the oil market to find a new equilibrium.—. Looking at the numbers, valuations appear to be attractive relative to other sectors, but given the rapid changes in the underlying fundamentals, it is difficult to have much conviction. The recent fall in the U.S. dollar has been positive for the sector, and if the overall market participation broadens out beyond the narrow group of growth stocks that have led the strong rally, the sector could benefit, given its value-orient profile. But until we get more clarity on sustainability of the economic recovery, we are maintaining a marketperform rating on the sector.
Sector Overview: Energy
Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.
Source: Charles Schwab, as of 09/10/2020
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare. Clients can log in to see our top-rated stocks in the Energy sector.
* As represented by the S&P 500 index
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