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
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
What You Can Do Next
- Review your sector allocation. If you aren’t sure how to analyze your sector weightings, a Schwab Financial Consultant can help.
- Talk to us about the services that are right for you. Call us at , , or .