According to one Deutsche Bank analyst, “the energy sector is a falling knife and should be avoided.”
Those are the words of David Bianco, chief U.S. equity strategist at Deutsche Bank. Bianco made the comments Wednesday, following the company’s 14th annual markets outlook breakfast.
Continue Reading Below
Benchmark U.S. crude broke below $61 a barrel Wednesday to trade at its lowest level since July 2009; just the latest leg down since hitting a peak of $107.26 in June.
And those “cheap” energy stocks keep getting more attractive for investors looking for deals as the year winds down. In early trading Wednesday, 19 of the 43 energy names in the S&P 500 were hitting fresh 52-week lows. And four of 2014’s five worst performing S&P 500 stocks are from the energy sector: Transocean (NYSE:RIG), Denbury Resources, Noble Corporation (NYSE:NE) and Ensco PLC.
“The energy sector is uninvestable and the drop in price for oil is faster than anyone expected,” said Bianco. “Until the commodity price stops falling and we get through at least one earnings season, we will not know what the impact will be on these companies.”
The impact of a weak energy sector is broad-based, according to Deutsche Bank research, which could hurt S&P 500 earnings growth for 2015. Energy and materials account for 15% of S&P 500 earnings and continued weakness in energy, according to Bianco, will cause S&P 500 earnings growth to decelerate.
Share of S&P EPS by End Market Source: Deutsche Bank
“We could be looking at an earnings recession for S&P 500 companies,” he said. As of right now, Bianco expects low single-digit earnings growth for the S&P 500 in 2015, around 6%.
But it’s not all doom-and-gloom at Deutsche. Looking ahead to the New Year, health care and technology stocks should continue to be winners, despite their popularity among investors.
“Health care is a crowded space, but for good reason,” he said.
David Bianco will be joining Maria Bartiromo on “Opening Bell” January 1st in an exclusive 2015 look ahead.