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.

Oil prices have retreated sharply on demand concerns amid the risk that the coronavirus epidemic will slow global growth. The rapid retreat is indicative of the oversupply issue that has hampered the industry for some time. In the past, supply disruptions led to persistent price increases, as did flare-ups in geopolitics—but in the age of fracking, lower OPEC market share and increasing North American production, the duration and degree of price shocks have been greatly diminished. Beyond the secular issues that the sector faces, concerns about slow global growth is yet another headwind to the sector.

The renewed rise in the value of the U.S. dollar also has pressured the energy sector amid the pullback in oil prices, resulting in weak relative performance, compounding multi-year underperformance. While this has led to attractive valuations from a historical perspective, very poor fundamentals lead us to believe that it’s a value trap.

The long-term outlook for the sector is challenged from a fossil-fuel perspective, and the shift toward renewables by the major energy companies is not likely to offer any short-term relief. However, given the ongoing probability of geopolitical escalations and aggressive supply constrains by OPEC, we maintain a marketperform rating on the Energy 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 03/05/2020.

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 ServicesIndustrials
Consumer DiscretionaryInformation Technology
Consumer StaplesMaterials
FinancialsReal Estate
Health CareUtilities

 

Next Steps

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.

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.