CC Simple #1; Positioning for The Energy Rebound?
CC Simple #1; Positioning for The Energy Rebound?
Do you chase returns or do you invest when there is blood? Energy Y/Y earnings growth an absolute shit-show for Q3 2024, but this is history. What is the cheapest sector in the SP500?
Welcome to CC Simple #1.
A new section in the Corporalis Commodis Substack is now open; CC Simple.
CC Simple is aimed for both paid and free readers.
This is the first CC Simple article. CC Simple is intended for shorter letters. I usually provide large and in depth letters “The Real Deal”, but from time to time shorter letters will be provided in the category CC Simple.
Content; 2,149 words 13,604 characters, 11 charts
Kicking off with CC Simple #1, the full content of this article will be open to everyone.
This is not financial advice, and you should always do your own due diligence. Errors may occur.
In this letter we will take a look at the cheapest sector in SP500, how the Y/Y earnings growth are looking for sectors + comparing the situation for Q3 2024, Q3 2022 & Q3 2020 + psychology and sentiment at particular periods, what the SP500 analysts are projecting for Energy 2025, extreme equity concentration, capital flows in/out sectors and the total forward PE for SP500. Highlighting that it does not matter what sector it is, historically the best time to buy is when no-body wants the sector, often accompanied with weak earnings growth, also often accompanied with FOMO in the opposite segment.
For peculiarly interested, I will also provide earnings growth insights in to segments of oil, e.g. oil-service. Oil service is waiting for the leaders, as I have stated many times; Expect little action with minor capital flows.
First out, ETF flows.
Private clients of BoFA are going on the defensive.
Top Inflows into Defensive Sectors:
The largest inflows are into Municipals, Dividend, and High Yield (HY) ETFs. Municipal bonds and dividend-focused investments are generally considered more stable and are often sought after in uncertain markets, as they tend to offer regular income with relatively lower volatility.
Utilities, another traditionally defensive sector, also received positive inflows. Utilities are known for stability due to consistent demand, regardless of economic conditions.
Outflows from Growth and Riskier Assets:
The chart shows outflows from sectors associated with higher risk and cyclicality, such as Energy, Emerging Markets (EM) debt, Growth, and Tech. This shift away from these sectors implies a preference for lower-risk, defensive positions. The largest outflow came in Energy.
Low-Volatility ETFs:
The positive flows into "Low-vol" also reinforce the trend toward more conservative, defensive investments, as low-volatility funds are designed to reduce exposure to market swings.
This is a general rotation to defensive assets, but clearly Energy is less desired. No wonder, which I will display below through earnings.
S&P 500 Earnings Growth Y/Y
Q3 2024 - so far, lacking companies such as Exxon and Chevron.
Tech is absolutely killing it, while Energy is experiencing a tougher period after its massive growth 2020-2022. Psychology at the time; The FOMO is in for tech, and despair for energy.
Top-Performing Sectors (Positive Earnings Growth)
Information Technology (16.0%)
Communication Services (11.5%)
Health Care (5.8%)
Financials (5.7%)
Under-Performing Sectors (Negative Earnings Growth)
Materials (-4.7%): Materials are experiencing a decline, likely impacted by slowing global demand, fluctuating commodity prices, or reduced construction activity.
Industrials (-11.0%): Industrial companies face significant declines, possibly due to supply chain challenges, rising input costs, or weakening demand in manufacturing and heavy industries.
Energy (-27.3%): Energy is the hardest-hit sector, showing a substantial drop in earnings. This may reflect declining oil and gas prices, reduced demand, or high production costs. Energy companies often experience volatility as earnings are closely tied to commodity prices.
You are supposed to be invested in a stock, because you expect that stock price to be higher. Why? Well, because you think the company is going to make more money in to the future. Meaning, as you buy them (the quote; buy when there is blood in the streets) the earnings should not be that good yet. Lets back up two years, how was the situation in Q3 2022?
Q3 2022
Situation completely turned upside down. Energy absolutely killing it, and dwarfs the rest of the sectors. In this period, going by the ideology ‘when there is blood in the streets’ — which way should you have looked? As a general thumb rule, one should look the opposite way.
Psychology at the time; FOMO is in for energy, and despair for tech.
Top-Performing Sectors (Positive Earnings Growth)
Energy (130.9%): Energy by far the strongest performer, with an enormous earnings growth of 130.9% Y/Y
Real Estate (18.4%)
Industrials (15.9%)
Under-Performing Sectors (Negative Earnings Growth)
Consumer Staples (-1.7%): Consumer Staples saw a small decline, potentially due to rising input costs impacting profit margins in essential goods.
Health Care (-1.9%): Health Care's slight decline might be related to cost pressures or a slowdown in pandemic-related revenues for some segments.
Information Technology (-2.1%): Information Technology saw a decline, likely due to rising costs and other factors.
Utilities (-4.9%): Utilities, often seen as a defensive sector, experienced a decrease, potentially due to rising operational costs or lower profit margins.
Materials (-15.7%): The Materials sector shows a large decline, possibly impacted by high input costs and slowing demand, which reduced profitability.
Financials (-20.2%)
Communication Services (-22.2%
Energy & Tech price action
Now lets chart the price action, in this particular period. Using XLE ETF (ENERGY) and XLK ETF (TECH) as proxy.
XLE, XLK - Total Return
Start of chart = mid March 2020
The chart reflects both price action and total return in percentages where Energy and Tech is currently sitting at 228% and 193%, respectively. As the chart displays, energy investors had priced the earnings growth in already by early 2022, at the same time tech was already in decline. Front running earnings growth/decline. Ironically, we have seen no sharp draw down in Energy in this weaker period, only consolidation the past two years reflecting the mid term incoming weaker earnings growth seen 2023/2024, with higher lows sneaking up on the highs. By the time the Y/Y earnings growth became visible in Q3 2022, one ‘should or could’ have already rotated.
Q3 2020
Lets move back to 2020.
Energy an absolute shit-show for Q3 2020, reflecting the COVID impact. Well, even though how “shit” Energy seemed at that time, both on their balance sheet and general sentiment, this was exactly when one should have scooped them up. Psychology at the time; FOMO is in for tech, and despair for energy.
S&P 500 ENERGY - SEGMENTS
Despite energy’s current broad negative Y/Y earnings growth, a deeper dive displays Oil Services and Storage & Transportation are holding up fine, while Refining & Marketing takes the biggest hit. Bear in mind, even though Oil Services is holding up fine, the broad energy component has weak Y/Y growth which ultimately impacts overall capital flows. That being said, there is many other factors that impact capital flows. Capital flows is something you need for greater price action, despite good fundamentals.
S&P 500 ENERGY - THE PATH ONWARD
What are the SP500 analysts projecting?
Despite the current weak growth, the SP500 analysts are seeing a completely different picture moving in to H2 2025. Estimating a Y/Y earnings growth that balances early 2025, and for Q3 2025 & Q4 2025 the analysts estimates 23,5% and 18,9% Y/Y growth, respectively.
Breakdown of the Projected Earnings Growth:
Q4 2024: A projected decline of -19.9%, suggesting analysts expect weaker earnings for the energy sector compared to Q4 2023.
Q1 2025: A continued decline of -3.0%, indicating that while earnings are still expected to decrease, the rate of decline might be slowing significantly.
Q2 2025: Projected to stabilize with a slight increase of 0.4%, potentially marking the beginning of a recovery.
Q3 2025: A strong rebound with a projected growth of 23.5% Y/Y, signaling expectations of a significant recovery in energy sector earnings.
Q4 2025: Continued positive growth at 18.9%, suggesting sustained improvement in the sector.
Now, with this in mind — what is the cheapest sector in the S&P 500, currently?
You guessed it, it is indeed Energy.
Breakdown
High Valuations in Growth Sectors: Information Technology and Consumer Discretionary have the highest forward P/E ratios, indicating very high optimism. Information Technology is standing with a high forward PE not only relative to the averages portrayed in this data, but to the broad historical norm.
Defensive and Value Sectors: Utilities, Consumer Staples, and Health Care have moderate P/E ratios, indicating demand for stable, defensive investments.
Cyclical Sectors at Lower Valuations: Financials and Energy have the lowest forward P/E ratios, reflecting the weak period, more cautious expectations or potential cyclical challenges. Energy is the cheapest sector in the SP500.
In summary, the S&P 500 is trading at a high premium overall, with certain growth sectors carrying significantly higher valuations. Bear in mind the historical averages portrayed are only relative to the 5yr and 10yr. The 5yr is very skewed to the upside because of the recent 5yr inflated events in the stock market, same goes for the 5yr average for Energy that is skewed to the downside. This is not giving an overall accurate picture. Even the 10yr average does not portray an overall picture, as it only accounts for the recent historical rally past decade. We can also see traditionally lower-growth or cyclical sectors are closer to the relative 5 and 10yr historical norms while Energy is really standing out, with a significant gap up to the other sectors. Energy is the cheapest, a great setup for potential earnings growth.
Historical PE ratios for SP500, not forward PE
To illustrate where SP500 are in the more broader picture, it is both standing at 100 year elevated levels, while also moving to a more short-term elevated level as well.
US equity market concentration
Updated chart - Extreme Concentration
The high multiples might have to do with the fact that the top 10 stocks (not the top 10%) in the S&P 500 account for a whopping 38% of the total S&P 500 Market Cap. That is 10 stocks accounting for almost half of the market cap versus the other 490 stocks. An extreme concentration and poor diversification, but not surprising for us here at Corporalis Commodis. When only the top 10% of S&P 1500 has managed positive EBIT growth the past 21 consecutive months, while the bottom 90% of S&P 1500 has been in decline — with the bottom 50% experiencing an even sharper EBIT decline for 21 consecutive months — this extreme concentration is partially the result. Read previous letters for in-depth references. The current stagflation they are trying to hide is a good starting point, providing the actual real adjusted GDP growth since Q1 2019. After all, the U.S. economy has stagnated and experienced a combined 5yr negative real alternative adjusted GDP growth. Stagflation in disguise.
The Stagflation They Are Desperately Trying To Hide (LINK)
S&P 500 - TARGETS AND RATING
25th October, 2024
Energy with the fewest sell ratings, standing at 3% matched by Real Estate.
Energy has the highest buy ratings as well, standing at 62% alongside Comm. Services.
25th October, 2024
Comm. Services, Health Care, Energy and Info. Tech bottom-up targets; 14,9%, 13,7%, 13,6% and 11,7% — respectively.
Summary: Is It Time to Accumulate Energy Stocks?
In this letter, I’ve taken a dive into the S&P 500 sectors, touching on year-over-year earnings growth trends, capital flows, forward P/E ratios, and what history tells us about investing when sentiment is low. Right now, we’re seeing capital rotate defensively, with private clients at BofA shifting into safer assets like municipal bonds, dividend funds, and low-volatility ETFs. Gold fund flows are also on the up, something I have only shared with Corporalis Commodis Discord. The largest outflows? Energy and other high-risk sectors, a sign that investors are shying away from cyclical and growth-sensitive areas.
But there’s something worth noting here: historically, the best time to buy into a sector is precisely when it’s least popular—often accompanied by weak earnings growth, as we see now in Energy. Energy, which outperformed spectacularly in 2022 with over 130% Y/Y earnings growth, is currently experiencing a down cycle, with earnings down 27.3% in Q3 2024. This reflects lower commodity prices, a slower economy, and higher production costs. However, this setup is eerily similar to Q3 2020 when Energy was out of favor, yet positioned for a significant rebound.
Sector rotation history shows that buying into cyclically depressed sectors like Energy—when the “blood is in the streets”—often leads to strong returns. Notably, the S&P 500 analysts project a strong recovery for Energy in H2 2025, with 23.5% and 18.9% Y/Y earnings growth expected for Q3 and Q4, respectively. Despite current challenges, Oil Services and Storage segments within Energy are holding steady, suggesting that some areas within the sector remain resilient, while waiting for the leaders.
Further reinforcing the case for Energy, it’s currently the cheapest sector in the S&P 500, with a forward P/E ratio that reflects caution and lack of enthusiasm. In contrast, high-growth sectors like Information Technology and Consumer Discretionary are trading at elevated valuations, signaling potentially overextended optimism. The Energy sector’s low valuation could indicate a mispricing, especially if earnings stabilize and start to climb as projected.
On a broader level, the S&P 500 also stands at historically 100 year high valuations and extreme concentration, suggesting limited upside without substantial growth — with the top 10 stocks now accounting for an astonishing 38% of the index’s market cap. This level of concentration leaves the market increasingly vulnerable. It’s no surprise, considering only the top 10% of the S&P 1500 has seen positive EBIT growth over the past 21 months, while the bottom 90% has been in decline, with the bottom 50% seeing even sharper EBIT contractions. This concentration is a clear sign of structural fragility, exacerbated by the current stagflationary environment—a stagnating economy masked by inflated metrics, as I have detailed in previous letters. In times like these, cyclical sectors like energy, with low relative P/E ratios, can become attractive for investors looking to accumulate value plays with upside potential alongside limiting exposure to the extreme concentration we are seeing relative to the past century. Bear in mind, it is in the slow periods the stealth accumulation goes on.
Conclusion: Positioning for the Energy Rebound
As defensive positioning recently have become popular, the SP500 is concentrated like never seen before even surpassing The Great Depression era, the nifty fifty run in the 50s & 60s and the dotcom bubble 2000, with tech sectors elevated by high optimism, energy remains overlooked—a sector few want to touch due to recent poor sentiment and earnings. However, history and forward projections suggest this could be an ideal time to be contrarian. As capital eventually flows back into cyclicals, those positioned early in energy could stand to benefit from the projected 2025 earnings growth rebound. In the investment world, opportunity often lies in the most contrarian bets, against the herd — and energy today fits that mold, particularly when contrasted against the concentrated top-heavy SP500. That being said, I am not optimistic about the economy in the short term as we are currently in a very slow period for the broad economy, where the economy is currently being choked. Read previous letters for references.
Note; SP500 analysts earnings estimates for energy in 2025 does not mean it will actually materialize. This is their projection.
Best Regards
Corporalis Commodis