Energy stocks have been the worst performing sector in the S&P 500 index so far this year. Last week, oil slipped into a bear market, but the benchmark U.S. index is holding up, and has gained 8 percent year to date.
The correlation between the S&P 500 and oil prices has dropped to the lowest since January this year, mainly because energy stocks have lost much of their significance in the index.
The oil price crash that started in 2014 wiped out much of the profits of oil and gas companies, dragging down their share prices and erasing billions of the energy firms’ market capitalizations.
Thus, the energy sector’s importance and weighting in the S&P 500 dropped earlier in June to below 6 percent, the lowest level since 2004, Bloomberg data shows.
According to Siblis Research, energy accounted for 12 percent of the S&P 500 sector weightings in the years 2010 and 2011. Energy stocks’ importance started to drop, touching a 6.5 percent weighting in 2015 when the oil price crash was in full swing. Last year, the energy sector’s influence inched up to around 7.5 percent of the S&P weightings. Now it is below 6 percent, the lowest in more than a decade.
The energy sector now has less influence in the S&P 500 index than the combined weights of Apple and Alphabet, CNBC has calculated.
Meanwhile, the S&P 500 has gained more than 8 percent year to date, at a time when the WTI 1st front-month contract has shed more than 22 percent since the beginning of the year. Related: Is Big Oil’s Bet On Petrochemicals A Bust?
In its market commentary on U.S. equities performance in May 2017, S&P said that the S&P 500 posted seven new closing highs, and gained 1.16 percent in May, bringing the year to date return to 7.73 percent. By sector, “energy was again the big decliner, falling 3.96% in May as oil prices closed the month down. Year-to-date, the sector was off 13.58%, the worst of any group, as its one-year return was in the red, off 3.49%,” S&P said in its market overview for last month.
“Oil moved up for most of the month, and then fell back, as OPEC continued its production limit,” S&P noted, commenting on the cartel’s decision to extend cuts as-is into March 2018. This decision was met with an underwhelming reaction by the oil market. On May 25, the day on which OPEC announced the extension of the cuts, the WTI 1st front-month contract closed at US$49.14. On June 27, WTI closed at US$44.24.
Energy stocks have felt the pinch of the volatile and lower-for-longer oil prices.
The energy sector’s influence in S&P 500 is so low now that the industry’s projected earnings are expected to have little impact on the S&P 500 earnings, S&P Global portfolio manager Erin Gibbs said on CNBC’s ‘Trading Nation’ last week.
“For energy to really have an impact on the overall broader market and what kind of earnings growth we’re expecting, it just has to be astronomical numbers” Gibbs noted.
“We’re still looking at double-digit earnings growth, with or without the energy sector growing, so we’re still in a healthy shape overall for the broader market,” she said.
So with energy stocks now having so little weight on the S&P 500, it’s not surprising that the index has gained 8 percent year to date, while crude oil is off more than 20 percent.
By Tsvetana Paraskova for Oilprice.com
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