Hurricanes, volatile energy markets, and god knows what else haunt the stock market these days. But equities are holding up surprisingly well, considering that everything but the kitchen sink has been thrown at Mr. Market. The S&P 500, for instance, is now about 2.5% below its post-2000 peak set back in early August.

Does the market’s resilience reflect optimism about future earnings? Certainly it’s easy to be sanguine about the energy industry’s capacity to refine greater earnings. As a Zacks report today reminds, the outlook for the sector continues to burn bright.
“As of late Friday, and ahead of Hurricane Rita hitting landfall, the energy sector was displaying the greatest aggregate strength in earnings estimates revisions,” a Zacks commentary dated today advises. “Of the 25 highest ranked industries, seven are related to oil. The strong showing is not surprising given that energy firms are driving the positive revisions in full year S&P 500 earnings estimates.”
Not surprising, perhaps, but neither is it universally accepted that the energy sector stands to gain the most when it comes to higher earnings expectations in the foreseeable future. Consider what Mr. Market does, as opposed to what the seers predict. On that score, the S&P 500’s energy sector (one of ten that comprise the equity benchmark) remains in the bottom-half (number six out of ten, to be precise) ranked by Friday’s market cap, according to data from Standard & Poor’s. True, energy’s relative market cap has moved up a notch from seven a year ago. But the financials sector has remained firmly in the number-one slot too.
In case you haven’t noticed, companies that derive sales and profits from various financial activities have found the going a bit rougher of late. The ongoing elevation of interest rates, on the short-end at least, is one reason. With the gap between short and long rates continuing to shrink, the age-old game of borrowing short and lending long isn’t quite what it used to be a year or two previous. For the moment, the change in the yield curve has hit hardest at the smaller, more leveraged financial operations, such as Annaly Mortgage Management, as we discussed last week. No wonder that industries such REIT mortgage trusts and finance leasing operations get relatively low investment rankings from Zacks at the moment.
Does that mean it’s time to throw in the towel for big-cap financial companies? Mr. Market doesn’t think so, or at least he’s not saying so currently, to judge by relative ranking changes in the ten sectors that comprise the S&P 500. But Mr. Market isn’t always known for his infallible to predict.
It’s not as if the financials sector is only nominally in the lead when it comes to the market capitalization awarded by the collective decisions of investors. In fact, there’s no contest, suggesting that the market sees nothing but clear skies for years to come in the likes of Citigroup, Charles Schwab, and Fannie Mae. Indeed, financials account for more than 20% of the S&P 500’s $10.97 trillion market cap. The number-two sector, Information Technology, is a distant 15%, while number-six energy carries something close to insignificant at around 10%.
Energy, of course, isn’t insignificant, as recent events suggest. Nonetheless, treating the sector as though it were in fact of relatively low consequence is a luxury that America can no longer afford. But exactly when that luxury ends is the question. On the matter of valuing stocks, luxury rolls on, one could argue. So too in the matter of building gasoline refineries for meeting the enduring rise in demand.
As always, distinguish between being right and making money. Sometimes the two go hand in hand, but very often one never meets the other. Mr. Market’s agenda takes orders from no one.