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Energy Sector Rating: Marketperform

What is the energy sector?

It includes exploration, drilling and mining, refining and marketing, storage and transportation of oil, natural gas and coal.

The energy sector had been under extreme pressure due to the massive supply/demand imbalance perpetuated by the COVID-19-related economic shutdown, pressuring oil prices to record lows (even briefly negative at one point). This paints a very poor fundamental backdrop for the sector, given questions as to when the oil market will rebalance. And the speed of the deterioration makes valuations almost impossible to assess.

However, production is being slashed quickly, putting less pressure on constrained storage capacity, and demand may stabilize as the economy is slowly beginning to reopen. 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.

To be clear, while we expect volatility to persist and stock prices for these companies could fall further, we think that the S&P 500 Energy sector may have put in at least a short-term low. This does not imply that we recommend overweighting the sector at this point. It is far from clear how long it will take for the oil market to rebalance supply and demand—although the recent rise in oil prices is promising. We cannot trust metrics for valuations, as earnings forecasts are being cut sharply, and the fundamentals of the sector are still quite negative. The recent fall in the U.S. dollar has been positive for the sector, if the overall market continues to rally, the sector’s high sensitivity to it could be a strong macroeconomic tailwind, which has been confirmed by the strong short-term relative performance. Therefore, we are maintaining a marketperform rating on the sector.

Sector Overview: Energy

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 06/09/2020

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

Communication Services Industrials
Consumer Discretionary Information Technology
Consumer Staples Materials
Financials Real Estate
Health Care Utilities

 

What You Can Do Next

Health Care Sector Rating: Marketperform
Schwab Sector Views: Changes Are Coming

Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market or other conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly. For more information on indexes please see www.schwab.com/indexdefinitions.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

Investing involves risk including loss of principal.

Currencies are speculative, very volatile and are not suitable for all investors.

Commodity-related products, including futures, carry a high level of risk and are not suitable for all investors. Commodity-related products may be extremely volatile, illiquid and can be significantly affected by underlying commodity prices, world events, import controls, worldwide competition, government regulations, and economic conditions, regardless of the length of time shares are held. 

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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