Energy To Drive Q2 Earnings: Will ETFs Rebound?

The energy sector, which was the biggest drag on the earnings growth picture over the past two years, is set to impress in second-quarter earnings. This is especially true as total earnings for the sector are expected to be up 276.2% from the same period last year, as per the latest Earnings Trends. In fact, it is the major contributor to the S&P 500 earnings growth in Q2.

However, sliding oil prices have taken a toll on energy stocks and ETF this year. As a result, the ultra-popular ETFs Energy Select Sector SPDR XLE, Vanguard Energy ETF (NYSE:XLE) VDE, iShares U.S. Energy ETF IYE and Fidelity MSCI Energy Index ETF FENY shed 11.5%, 13%, 12.4% and 12.8%, respectively, in the year-to-date time frame. These beaten down prices could be a good opportunity for investors’ to make a play on the solid sector’s earnings growth (read: Oil ETFs: Short-Term Bane, Long-Term Boon).

Let’s delve into the earnings picture of two oil biggies – Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX) – that dominate the above-mentioned funds’ portfolio and have the power to move the funds up or down in the coming days. Both firms are slated to release their earnings before the market opens on July 28 and collectively make up for 39.9% for IYE, 37.9% for XLE, 37.3% for FENY and 37% for VDE.

According to our surprise prediction methodology, a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) when combined with a positive Earnings ESP makes us confident in predicting an earnings beat. A Zacks Rank #4 or 5 (Sell rated) is best avoided going into the earnings announcement, especially when the company is seeing negative estimate revisions. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

What’s in the Cards?

Exxon Mobil has a Zacks Rank #4 and an Earnings ESP of 0.00%. The stock saw a negative earnings estimate revision of couple of cents over the past seven days for the to-be-reported quarter but delivered positive earnings surprises of 1.46% on average over the last four quarters. Further, its earnings are expected to grow a whopping 101.9%. Though the stock has solid Growth Style Score of A, a Value and Momentum Style Score of C and F, respectively, looks ugly (see: all the Energy ETFs here).

Chevron also has a Zacks Rank #4 and an Earnings ESP of 0.00%. The company is expected to see substantial earnings growth of 85.68% year over year for the to-be-reported quarter. It delivered an average positive earnings surprise of 32.36% in the last four quarters but has witnessed a negative earnings estimate revision of four cents over the past seven days. Though the stock has a solid Growth Style Score of B, Value and Momentum Style Score of D and F, respectively, is unfavorable.

Conclusion

The duo has an unfavorable Zacks Rank and saw a negative earnings revision trend. Analysts reducing estimates right before earnings — with the most up-to-date information possible — is not a good indicator. Further, the above-mentioned ETFs have a Zacks ETF Rank #4, suggesting that some pain is still in store. However, solid year-over-year earnings growth could provide some upside to these ETFs (read: Profit from Bearish Oil Market with These ETFs).

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