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Energy stocks may be a drag on the bull market this fall

  • It's been another ugly day for "Big Energy," with 52-week lows again for everything across the board.
  • Another epic miss on oil prices is causing traders to push down their earnings expectations for big oil, and they're not done yet.

It's been another ugly day for "Big Energy," with 52-week lows again for everything across the board, including big oil like Exxon Mobil; oil service names like Schlumberger and Halliburton; exploration and production names like Hess, Apache, Anadarko and Noble Energy; and drillers like Ensco, Transocean, Rowan and Nabors.

What's going on? Another epic miss on oil prices is causing traders to push down their earnings expectations for big oil, and they're not done yet. And it's the price of oil that determines the price and the valuation of oil companies.

Go back to January, when analysts were confidently predicting oil would be close to $60 by the third quarter. Instead, it has been mired in the $45 to $50 trading range, and dipped as low as $42 in the middle of June. And it's happening again, with oil now at a 3-week low.

Oil and oil stock prices are very closely correlated. Oil company earnings were supposed to rebound big-time this year and be the major contributor to earnings for the S&P 500, but with oil well below expectations, analysts have been aggressively taking down third quarter earnings estimates.

At the beginning of April, earnings for the oil group were expected to be up a whopping 222 percent for the period ending Sept. 30th, but now they're expected to be up only a little more than half that, at 132 percent.

So now you have two big problems with energy stocks. First, despite the price drops there's still not a compelling valuation for oil companies because no one knows if oil is going to go up or down from here.

The second problem is just as serious: how do you get anyone interested in the energy story, even with stocks at new lows?

Energy stocks are now only about 6 percent of the weighting in the S&P 500. But the S&P is at all-time highs. If I am a big investor, if I'm a big hedge fund, or a large actively-traded mutual fund at Fidelity or Vanguard, why do I care about energy when I have tech (22 percent of the S&P) and financials (15 percent) moving?

Why do I care, even with prices depressed, when a lot of people are now saying shale will permanently depress oil prices, as it has with natural gas?

This is the question that the oil bulls have to answer.

WATCH: Cashin says keep your eye on oil

  • Bob Pisani

    A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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