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New York CNN  — 

Oil and gas stocks have been on a two-year tear, ripping ahead as natural gas prices surged due to supply chain kinks, a strong economy, and Russia’s invasion of Ukraine. Fears of a recession are now slamming on the brakes.

What’s happening: Brutally high oil and gas prices were the talk of the town last year and one of the largest contributing factors to sky-high inflation. That’s bad news for automobile drivers, but ended up being great for the energy industry as oil prices and energy stocks are closely interlinked.

The energy sector returned more than 60% last year, significantly outperforming every other S&P 500 sector. No other sector gained even 5% in 2022.

Earnings ahead: Lately, those surges have been ebbing. The S&P 500 energy sector is down about 1.4% so far this year and was among the weakest on Thursday. It finished the day 0.9% lower. Oil prices, meanwhile, fell by $2 per barrel as fears of a recession rise.

A recession would weaken demand for fuel as consumers watch their spending at the pump.

The five largest oil companies — ExxonMobil, Chevron (CVX), Shell, BP (BP) and TotalEnergies (TTEC) — made record profits in 2022, pulling in about $200 billion. That’s on par with Greece’s entire gross domestic product for the year.

Now, as those companies prepare to report first quarter earnings for 2023, analysts are expecting a bit of a profit pullback.

“At a high level, we expect a mixed quarter with headline earnings that disappoint against the consensus estimates,” wrote Bank of America analyst Doug Leggate in a note this week.

Analysts at Moody’s agree. They expect growth in demand for oil and natural gas will ease as the largest economies cool off over the next two years. “Our macroeconomic base case points toward a global slowdown in economic activity on account of tight monetary and financial conditions,” they wrote in a note.

That will be reflected in the earnings of the top five companies which Moody’s analysts say will likely decline over the next two years — though not by too much.

Beyond earnings: At the risk of sounding like a broken record, Q1 earnings reports aren’t really about last quarter. Oil analysts are already thinking about the future — and they’re predicting hard times for Americans at the pump. That typically translates to lower payouts for Big Oil.

But a surprise move by OPEC+, an alliance between the Organization of the Petroleum Exporting Countries (OPEC) and a group of non-OPEC oil-producing countries, including Russia, Mexico, and Kazakhstan, to cut oil production by more than 1.6 million barrels a day, could limit the downside for prices, and oil company earnings.

“Oil fundamentals are expected to tighten as we move through the year,” wrote Warren Patterson, head of commodities strategy at ING in a note earlier this month. “Prior to these cuts, we were already expecting the oil market to see a fairly sizable deficit over the second half or 2023. Clearly, this will be even larger now.”

Though demand for gas and oil will likely slow in step with the global economy, constrained supply means that Big Oil should do just fine, even if last year’s record profits won’t be repeated.

Coming up: Exxon and Chevron report first quarter earnings next Friday. Exxon is expected to report earnings-per-share of $2.60, according to Refinitiv. Chevron is expected to report earnings of $3.38 per share.

Blackstone is feeling the commercial real estate slump

The ongoing commercial real estate slowdown has a new victim: Blackstone.

The investment firm is the largest owner of commercial real estate globally. Its distributable earnings — the profit handed to shareholders after expenses — plunged 36% since last year. That’s raising eyebrows on Wall Street as investors assess the fallout from last month’s regional banking crisis.

Blackrock’s decline was driven by an easing of value in its real estate investments. The company’s real estate segment’s distributable earnings fell 58% since last year. Profits from the sale of commercial real estate assets fell 54% to $4.4 billion, down from $9.5 billion last year. But that number is a reflection of fewer assets sold, not necessarily of lower prices, a spokesperson for Blackstone told CNN.

After decades of thriving growth bolstered by low interest rates and easy credit, the $20 trillion commercial real estate industry has seemingly hit a wall. Office and retail property valuations have been falling since the pandemic brought about lower occupancy rates and changes in where people work and how they shop. Rising interest rates have also hurt the credit-dependent industry.

Still, on an earnings call Thursday, CEO Stephen Schwarzman said that Blackstone was prepared to weather “adverse market conditions.”

Blackstone president Jonathan Gray emphasized on the call that the company has diversified its investments, and more-troubled office real estate only makes up 2% of their holdings. That’s down from 61% in 2007.

Gray told Bloomberg on Thursday that the collapse of Silicon Valley Bank and Signature Bank and the turmoil in the sector has created opportunity for Blackstone. The company, he said, has been talking to smaller banks to help lend to their clients as they look to tighten their credit.

The banking crisis, he said, and banks’ subsequent retreat from loose lending policies, could create a “golden moment” for credit and provide more opportunity for Blackstone to provide financing, he said.

Markets are starting to worry about the debt ceiling

Investors are finally starting to take the debt ceiling seriously, reports my CNN colleague Elisabeth Buchwald.

If lawmakers don’t raise the nation’s borrowing limit by June, the federal government runs the risk of defaulting on its debt obligations, Treasury Secretary Janet Yellen said in January. That would be catastrophic for the economy and put millions of jobs in jeopardy, Moody’s chief economist has said.

Investors are now demanding historically high yields for US Treasury notes that mature in July, which by some estimates is when the United States will default on its debt, absent any legislative action. That would mean bondholders aren’t repaid the money they’re owed on time.

Yields for three-month Treasury notes closed at 5.1% Thursday. That exceeded yields for longer-term Treasury notes.

Bonds with longer maturity dates tend to pay higher interest rates to compensate investors for locking down their money for a greater period of time. There’s also more uncertainty around the path that interest rates will take during that time.

When yields on shorter-term bonds exceed those of longer-term bonds it’s often a sign that bad economic times are ahead.