“When you buy into a huge oil production company, how it works out is going to depend on the price of oil to a great extent. It’s not going to be your geological home runs or super mistakes or anything like that. It is an investment that depends on the price of oil.”

Those are the words of super-investor Warren Buffett. The Oracle of Omaha’s net worth is $104.5 billion, so yeah, his words carry some weight.

This year, Buffett increased his energy investments, which turned out to be a shrewd move. Among the top 10 holdings of his holding company Berkshire Hathaway (NYSE: BRK.A, BRK.B) are the oil and gas behemoths Occidental Petroleum (NYSE: OXY) and Chevron (NYSE: CVX), two stocks that have defied the bear market.

The big winner of 2022 has been the energy sector. The main cause: soaring oil and gas prices, mostly due to supply disruptions caused by the Russia-Ukraine war and the COVID pandemic. Production curbs imposed by the cartel OPEC+ also have propelled crude higher.

As of market close Wednesday, the benchmark SPDR S&P Oil & Gas Exploration & Production ETF (XOP) has racked up a year-to-date total return of 41.13%, compared to a loss of 18.64% for the SPDR S&P 500 ETF Trust (SPY).

But it begs the question: will energy continue to dramatically outperform in 2023? The answer is, probably not.

Energy prices recently have been trending downward, as demand for oil and gas falls due to recession fears and economically harmful COVID outbreaks in China. Witness the plummeting price of gasoline, which in the U.S. currently hovers at a national average of $3.10 per gallon, down from about $5.00/gal in June.

Considerable investment capital has flocked to the energy sector this year. However, as 2023 unfolds, other sectors are likely to adopt market leadership, such as aerospace/defense, health care, and utilities. These are the “defensive growth” areas that are appealing during economic uncertainty.

Read This Story: The Defense Sector: Set to Soar in 2023

That said, energy’s primacy during 2022 has been impressive, with energy companies representing a disproportionate share of earnings and revenue growth.

For Q4 2022, the estimated earnings decline for the S&P 500 is -2.8%. If that figure is the actual decline for the quarter, it will mark the first time the index has reported a year-over-year earnings decline since Q3 2020 (-5.7%).

That’s quite a deceleration. On September 30, the estimated earnings growth rate for Q4 2022 was 3.7%.

The overall slowdown in corporate earnings growth helps explain the stock market’s recent dismal performance. However, the main U.S. stock market indices closed higher on Wednesday, as follows:

• DJIA: +1.60%
• S&P 500: +1.49%
• NASDAQ: +1.54%
• Russell 2000: +1.65%

Earnings beats from economic bellwethers FedEx (NYSE: FDX) and Nike (NYSE: NKE) put investors back in a bullish mood. Also lifting Wall Street’s spirits was better-than-expected consumer confidence data for December, released Wednesday. Hopes for a Santa Claus rally aren’t completely dead, just yet.

Energy’s lopsided contribution…

The estimated year-over-year earnings growth rate for the S&P 500 in calendar year (CY) 2022 is 5.1%. The energy sector is expected to report the highest year-over-year earnings growth of all 11 sectors at 151.7%. If this sector were excluded, the index would be expected to report a decline in earnings of -1.8% rather than growth in earnings of 5.1%.

The estimated year-over-year revenue growth rate for the S&P 500 in CY2022 is 10.4%, which is above the trailing 10-year average annual revenue growth rate of 4.1% (2012 – 2021).

All 11 S&P 500 sectors are projected to report year-over-year growth in revenues for CY2022. Five of these 11 sectors are projected to report double-digit growth, led by energy.

The energy sector is expected to report the highest year-over-year revenue growth of all 11 sectors at 45.1% (see chart).

Don’t expect a repeat of energy’s market-thumping performance next year. The latest global growth forecast from OPEC+ for 2023 has been cut to 3.2%, despite the cartel’s assumptions that the Russia-Ukraine war won’t worsen (a rather optimistic view).

Another wild card is China, which remains roiled by COVID and domestic dissent against Beijing’s pandemic policies.

Indeed, on Wednesday, the head of the World Health Organization said the agency is “very concerned” about rising reports of severe coronavirus outbreaks across China. Slowing economic growth in China translates into substantially less demand for energy.

A superb growth alternative for 2023…

As I’ve just explained, energy’s hot streak is likely to cool off in 2023. If you’re looking for a growth-oriented sector that’s poised to outperform in the new year, consider marijuana.

That’s right…marijuana. In fact, I’ve just launched a new service detailing how you can financially benefit from the consumer mainstreaming of cannabis.

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John Persinos is the editorial director of Investing Daily.

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