Technological advances in hydraulic fracturing in recent years have enabled drillers to extract oil and gas from America’s shale basins. The subsequent shale boom has been a big source of business spending, new jobs, and cheap energy for America’s consumers.
However, the shale boom has also added to the current global glut in oil supply, which is partially to blame for the recent crash in oil prices.
While lower oil prices might be trouble for the energy sector, US economists and investment strategists have argue that trouble in the energy sector will not cause systemic problems for the economy or financial markets.
BMO Capital’s Brian Belski notes that while energy is a major portion of the S&P 500’s market cap and earnings, it’s been shrinking in share for almost six years. From Belski’s note:
…Another concern we hear from clients is the “contribution drag” energy creates, given its meaningful weight in the index. Here again, we think investors are misinterpreting the data. For instance, energy EPS contribution for the S&P 500 has collapsed to roughly half its 2008 peak. Yet as Exhibit 5 (left) shows, S&P 500 EPS have had no issues rising to record levels despite the drag from energy stocks. In addition, energy is no longer as meaningful a part of the overall index — its sector weight has dropped roughly 50% from its 2007 peak and now only represents about 9% of the S&P 500 (Exhibit 5, right), ranking it sixth out of the 10 sectors in this regard. Therefore, we believe some investors are overemphasizing energy’s importance in this bull market…
So, if you’re heavily invested in energy, you should be concerned. But if you’re well-diversified or indexed to the S&P 500 — all things being equal — you should be ok.
Separate, Belski expects the S&P 500 to hit 2,250 by the end of 2015.