Energy stocks are back in vogue.
The S&P 500 index's energy sector has popped roughly 17% this year, making it the second-best performing category of the benchmark index behind communication services. Shares of Marathon Petroleum have climbed 43%, Exxon Mobil shares have added 22%, Occidental Petroleum shares have gained 16% and Halliburton shares have jumped 13%.
These robust gains come after a lackluster year for energy stocks. The energy sector fell roughly 5% in 2023, underperforming the broader S&P 500's double-digit gains as concerns about the global economy hurt energy demand. That was a reversal from the prior year, when energy stocks soared more than 59% after Russia's invasion of Ukraine sent crude prices well above $100 a barrel.
A surge in oil prices this year, driven in part by escalating tensions in the Middle East, has also helped prop up energy stocks. West Texas Intermediate crude futures, the US benchmark, settled at $85.02 a barrel on Thursday. Brent crude futures, the international benchmark, settled at $89.74 a barrel.
Some investors say that energy stocks are poised for more gains, given the continued geopolitical turmoil and the US economy's resilience. Energy stocks often do well when the economy is strong, since there's more energy demand to fuel goods- and services production.
Nancy Curtin, global chief investment officer at AlTi Tiedemann Global, says that energy stocks look attractive right now, in part because they are cheap relative to the rest of the market. The energy sector trades at about 13 times its expected earnings over the next 12 months, lower than the benchmark index's multiple of 21.
Hot inflation data, a scorching jobs market and a resilient economy have led traders to wager that the Federal Reserve likely won't cut interest rates until the second half of the year. Elevated rates are usually bad news for stocks, since they raise the cost of borrowing capital and bump up consumer costs from gas at the pump to food at the grocery store.
But shares of oil and gas companies tend to do well when rates are elevated. Energy is the S&P 500 sector with the highest propensity to outperform when rates are high, according to RBC Capital Markets data going back to 2010.
"When the market is expensive and the [economic] environment is questionable, cash flow will be key, and energy has plenty of it," said Bob Doll, chief executive of Crossmark Global Investments.
Production cuts by the Organization of the Petroleum Exporting Countries and its allies are also expected to help lift crude prices. Several OPEC+ countries announced in March that they have agreed to extend their voluntary production cut of 2.2 million barrels per day during the second quarter of 2024.
But not all energy stocks are expected to rise. Shares of clean energy companies, many of which are growing companies trying to load up on capital, were hammered in 2023 by high borrowing costs.
That trend has continued in 2024. The iShares Global Clean Energy exchange-traded fund, which tracks the performance of sectors from renewable electricity to semiconductors to solar energy, has slid roughly 11% this year. Plug Power shares have slipped 34% this year, SolarEdge Technologies shares have tumbled 25% and Enphase Energy shares have slid 8%.
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