Energy Stocks Soar as Market Heats Up

Energy stocks have made a dramatic comeback this year, with the S&P 500 energy sector rising approximately 17%, marking it as the second-best performing category of the index, just behind communication services.

by Faruk Imamovic
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Energy Stocks Soar as Market Heats Up
© Getty Images/Spencer Platt

Energy stocks have made a dramatic comeback this year, with the S&P 500 energy sector rising approximately 17%, marking it as the second-best performing category of the index, just behind communication services. Leading the charge, shares of Marathon Petroleum, Exxon Mobil, Occidental Petroleum, and Halliburton have seen impressive gains of 43%, 22%, 16%, and 13% respectively.

This rebound is particularly notable following a challenging 2023, where the sector saw a decline of about 5% amid global economic uncertainties that dampened energy demand. The surge in oil prices has been a significant factor behind the sector’s recovery.

Driven partly by escalating tensions in the Middle East, West Texas Intermediate crude futures recently settled at $85.02 a barrel, while Brent crude futures reached $89.74 a barrel. These price increases have bolstered the energy stocks, reflecting a renewed investor confidence in the sector.

Economic Factors and Market Forecasts

The resilience of the U.S. economy, coupled with hot inflation data and a robust job market, suggests that the Federal Reserve may hold off on cutting interest rates until later in the year.

Historically, energy stocks have performed well during periods of elevated interest rates, as seen in RBC Capital Markets data from the past decade. This trend is expected to continue, given the sector's capacity for high cash flow and the strategic production cuts announced by OPEC+ countries, which are likely to further lift crude prices.

Despite the broader sector's growth, clean energy stocks have not fared as well. High borrowing costs have continued to challenge these companies, as evidenced by significant declines in shares of companies like Plug Power, SolarEdge Technologies, and Enphase Energy.

The iShares Global Clean Energy exchange-traded fund, which tracks a range of renewable energy sectors, has seen a decrease of about 11% this year.

Outlook and Investor Sentiment

Investors remain optimistic about the potential for further gains in traditional energy stocks amidst ongoing geopolitical turmoil.

According to Nancy Curtin, global chief investment officer at AlTi Tiedemann Global, the energy sector is attractively priced relative to the rest of the market, trading at about 13 times its expected earnings over the next 12 months, compared to the benchmark index's multiple of 21.

Bob Doll, chief executive of Crossmark Global Investments, highlights the importance of cash flow in uncertain economic environments, stating, "When the market is expensive and the [economic] environment is questionable, cash flow will be key, and energy has plenty of it."

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