I’m a huge fan of 1960s spaghetti westerns, so pardon my allusion to the greatest installment of this cinematic genre.

The Good: The utilities sector is the best earnings performer for the fourth quarter of 2019, in terms of year-over-year growth reported (and projected) so far. The Bad: Energy is the worst earnings performer. And The Ugly: Overall earnings growth for the S&P 500 continues to be negative, with the earnings recession extending into its fourth consecutive quarter.

As Q4 earnings reports pour in, the stock market has gotten wobbly due to external factors such as the coronavirus outbreak. All three main U.S. stock market indices plunged Monday. In pre-market futures trading this morning, they’re poised to modestly recover.

Below, I’ll highlight shrewd ways to leverage these investment conditions. First, let’s look at the S&P 500’s earnings performance to date for the fourth quarter of 2019. The earnings recession continues.

As of this writing Tuesday morning, 17% of S&P 500 companies have posted actual Q4 results. Among these companies, 73% have reported a positive earnings per share (EPS) surprise and 67% have reported a positive revenue surprise. (The numbers that I use in this article for quarterly operating results come from the research firm FactSet.)

For Q4 so far, the blended earnings decline for the S&P 500 is -1.9%. Blended combines actual results for companies that have reported and estimated results for companies that have yet to report.

If -1.9% is the actual decline for the quarter, it will represent the first time the index has posted four straight quarters of year-over-year earnings declines since Q3 2015 through Q2 2016. Two straight quarters of earnings declines officially constitute an earnings recession.

Meanwhile, Q4 net profit margins have been under pressure as corporate costs rise. Eight of the 11 S&P 500 sectors are reporting a year-over-year decline in net profit margins in Q4 2019. We’re witnessing a dichotomy whereby corporate revenues are rising but earnings growth is negative. The seeds of inflation could be germinating, largely due to tariffs and wage growth.

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On December 31, the estimated earnings decline for Q4 2019 was -1.6%. Seven sectors have lower growth rates today (compared to December 31) due to downward revisions to EPS estimates and negative EPS surprises.

For Q1 2020, seven S&P 500 companies have issued negative EPS guidance and five S&P 500 companies have issued positive EPS guidance.

And yet, despite this overall decline in corporate EPS growth, equity valuations remain historically high. The forward 12-month price-to-earnings (P/E) ratio for the S&P 500 is 19.2, which is above the five-year average (16.7) and above the 10-year average (14.9).

From best to worst…

For Q4, the Utilities sector is expected to report year-over-year earnings growth of 18.9%, the highest of all 11 S&P 500 sectors. At the industry level, all five industries in this sector are expected to report robust growth in earnings.

Four of these five industries are expected to rack up double-digit earnings growth: Independent Power and Renewable Electricity Producers (131%), Multi-Utilities (26%), Gas Utilities (13%), and Electric Utilities (11%). There’s still time to tap the profit-making potential of the thriving utilities industry. For our latest list of the best utilities stocks, click here now.

The worst Q4 performer: the energy sector. But therein lay contrarian opportunities.

The Energy sector is reporting the largest year-over-year earnings decline of all 11 sectors at -42.5%. At the sub-industry level, four of the six sub-industries in the sector are projected to report a decline in earnings of 20% or more: Oil & Gas Drilling (-74%), Oil & Gas Refining & Marketing (-61%), Integrated Oil & Gas (-53%), and Oil & Gas Exploration & Production (-20%).

The other two sub-industries in the sector are reporting (or are projected to report) earnings growth of more than 10%: Oil & Gas Equipment & Services (28%) and Oil & Gas Storage & Transportation (13%).

Oil prices have been volatile and on a downward slope, weighing on the top and bottom lines of companies in the energy patch. The global coronavirus outbreak is slamming crude oil prices, due to concerns that the deadly illness will dampen travel and economic activity, in turn undercutting demand for fuel.

Prices yesterday for West Texas Intermediate (WTI) and Brent North Sea crude fell more than 2% for both benchmarks. It’s been a wild ride for crude oil all year (see chart).

Investors are continually left guessing as to which way the troubled and unpredictable energy sector will drive stocks. However, as the global economy in the first quarter of 2020 shows surprising green shoots of growth, energy demand should pick up and lift oil prices this year.

Energy demand and per-barrel prices should regain altitude over the long haul because of the rise of middle-classes in emerging markets. These newly affluent consumers yearn for the gas-guzzling cars and other petroleum-based amenities that they see in the West. This mega-trend makes fundamentally sound but beaten down energy stocks good value plays now. Despite the laudable goals of utopian dreamers, the rise of electric vehicles and renewables will not dethrone fossil fuels.

Over the short term, though, oil prices are likely to remain turbulent and caught in a downdraft. China is the world’s second-largest oil consumer and the country is having difficulty in containing the coronavirus outbreak. The uncertainty in China is offsetting optimism over OPEC production cuts and recent unexpected reductions in inventories.

Lower oil prices help consumers and certain businesses by reducing their costs. However, if crude sinks too low, it clobbers the energy sector, with collateral damage spilling into the broader stock market. And that’s the ugly truth.

Questions or comments? You can reach me at: mailbag@investingdaily.com

John Persinos is the editorial director of Investing Daily.