Will Energy Costs Play a Role in Determining the S&P 500’s Fate in 2023?

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The energy sector provided impressive aid in helping the S&P 500 meet its earnings projections for 2022—but will it still have the same impact in 2023?

As oil prices have dropped substantially in 2023, this industry may be unable to salvage earnings for that year. As such, we should anticipate further downgrades to these forecasts by analysts. 

Nominal economic growth and inflation lingering at lower levels will cause a decline in S&P 500 profits regardless of whether there is an official recession during 2023.

“The energy sector will remain an important factor in the S&P 500’s performance, but its impact may not be as strong as it was in previous years due to lower oil prices,” says Simon Smith, chief investment strategist at U.K.-based online trading platform FxPro. “The other key factor to consider is whether or not global economic activity will pick up, which could be a major driver of S&P 500 performance in 2023. Investors should pay close attention to economic data and any signs of recovery or continued stagnation.”

The energy sector (NYSE: XLE) salvaged S&P 500’s earnings in 2022. The same will only repeat this year with a significant shift in oil prices. In the long run, modifications to the cost of oil impact sales and profit estimates of the energy industry accordingly. Oil has seen sharp drops since its peak back in 2022.

The energy sector’s 12-month forward earnings estimate saw a significant boost in 2022, which is why S&P 500 overall has stayed robust and anticipates showing some growth over the following twelve months. This remarkable upsurge was a huge factor that kept total outlooks encouraging.

As the cost of oil plummeted from its record-high of $120 in June, earnings and sales projections for energy similarly declined by mid-September. Unless petroleum prices ascend again quickly in 2023, the outlook for the energy sector will darken even further.

As the energy sector fails to provide momentum for S&P 500 earnings in 2023, which sectors could drive the overall market? At present, there appear to be only one – utilities. It’s concerning that a traditionally defensive sector is leading S&P 500 earnings, as this does not bode well for the prospects of the broader market.

The industry-leading growth for 2023 will be declining, with consumer discretionary (NYSE: XLY) currently at the helm, followed by healthcare. We have not yet experienced any significant losses in technology earnings.

If we are to avoid a worse performance than in 2022, new leadership must emerge and sustain S&P 500 earnings estimates. It hasn’t happened yet, so the stock market has likely not reached its lows; indeed, things may get even worse before they get better.

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