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How Will Energy Stocks Respond to This Earnings Season?

energy stocks

By the time you read this, it is likely that the two largest American oil companies, Exxon Mobil (XOM) and Chevron (CVX), will have reported their calendar Q1 results, due out on Friday morning. We cannot know at this point exactly what they will say, but based on analysts’ estimates we can be pretty sure that both will report EPS that is significantly less than they showed in the same quarter last year. That is a dynamic that is expected to apply to most of the energy sector, and yet, as this chart for the SPDR Energy sector ETF (XLE) shows, energy stocks are significantly higher now than they were a year ago.

On the surface, that makes no sense. How can energy stocks be higher when profits are anticipated to be so much lower than a year ago, around 23% down for XOM, for example, and minus 20% for CVX?

The answer is fairly obvious when you look at a chart for oil over the last year…

…crude is higher than it was a year ago. While WTI has pulled back slightly recently, that comes after a strong four-month uptrend. Stocks in general are more about discounting the future than pricing in the past, so oil stocks are higher based on the assumption that higher oil prices will translate to higher future profits.

That all makes perfect sense, but there are potentially a couple of issues here.

First, it all rests on the assumption that oil prices will at least remain at these levels, if not move higher. If you have been reading what I have…

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