The underdog in Q3 earnings could now be the `big winner`
October 9, 2015, 12:44 pm

One of the most beaten-down sectors of the S&P 500 could be making a comeback, right in time for third-quarter earnings.

On Thursday, the S&P 500 energy sector extended gains into an eight-day winning streak, rising almost 2 percent.

Yet in terms of earnings, energy is still expected to be the worst-performing sector of the quarter.

According to FactSet, estimates for energy predict a 64.5 percent decline in earnings year over year, the most out of any other S&P 500 sector. In fact, the energy space is expected to weigh heavily on third-quarter earnings for the S&P, dragging down what would be a 2.3 percent expected growth rate sans energy, to negative 5.1 percent.

But now, the Federal Reserve`s decision to push back a rate hike is turning energy into a "big winner," says one strategist.

Larry McDonald of Societe Generale said emerging markets and commodities stand to gain the most from lower interest rates for longer. These markets have outperformed after the disappointing employment report the previous Friday, which showed much weaker-than-expected job growth.

Crude oil has rallied 11 percent in one week. The materials sector, expected to be the second-worst sector in third-quarter earnings, has also seen significant gains this week. The emerging markets ETF (EEM) and gold miners ETF (GDX) have gained 8 percent and 15 percent, respectively.

"They`ve made a big move over the short haul, so you may see a pullback," McDonald said. "[But] if the Fed`s pushing expectations out to March or June, then this space will be the big winner."

But according to Gina Sanchez of Chantico Global, the fundamental weakness in energy remains the same.

Sanchez said it will take another six to nine months for oil to stabilize, given the current supply glut. Additionally, she said she believes the moves in crude oil have more to do with the conflict in Syria than the Federal Reserve and interest rates.

"Moves in oil prices that are driven by geopolitical moves tend to be really brief. I think this is an opportunity to possibly sell some exposure you might be hanging on to, and wait for a better entry point later next year," Sanchez said.


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