Louis Krauskopf
NEW YORK (Reuters) – U.S. energy stocks are soaring as investors look to protect their portfolios from a worrying resurgence in inflation while benefiting from higher oil prices and a better-than-expected economy.
The energy sector is up about 17% in 2024, roughly doubling the year-to-date return of the broader index. Its rally has accelerated in recent weeks, making it the S&P 500’s best-performing sector over the past month.
One of the key factors is oil prices. Oil prices have risen 20% since the beginning of the year, driven by an unexpectedly strong U.S. economy and concerns about the growing conflict in the Middle East.
Some investors believe a rally in energy stocks could hedge against U.S. inflation. Consumer price increases this year have proven more persistent than expected, undermining expectations about how much the Federal Reserve will cut interest rates in 2024 and threatening to cap broader stock gains. be.
“If inflation picks up again, we have exposure to commodities through hedging,” said Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group.
The portfolio she manages is too heavily weighted toward energy stocks, including major oil companies. exxon mobil (New York Stock Exchange:) and chevron (NYSE:), she pointed to more disciplined capital spending by energy companies.
Top performers in the energy sector so far this year include Marathon Petroleum (NYSE:), up 40%; valero energy (NYSE:), up 33%.
As first-quarter earnings season heats up, the economy will be in the spotlight next week with reports from Netflix (NASDAQ:), Bank of America, and Procter & Gamble (NYSE:). Monday’s monthly U.S. retail sales figures will provide insight into U.S. consumer behavior after last Wednesday’s better-than-expected inflation report.
Energy stocks rose as the rally in U.S. stocks extended beyond the growth and tech companies that led gains last year. But if inflation expectations continue to rise and concerns about a hawkish Fed grow, investor appetite for non-commodity-related sectors could take a hit.
Inflation concerns have further roiled markets in recent weeks. Outside of stocks, concerns about rising consumer prices pushed gold, a popular inflation hedge, to record highs.Energy stocks performed well outside the U.S.
Shares of mining companies, steel companies and other commodity-related companies rose along with energy stocks.
“Investors are looking at the world and realizing that the economy is not slowing down that much…There are a lot of concerns now about bottlenecks in the supply of goods, especially oil,” said President Peter Tuz. Ta.Chase Investment Counsel Corporation
Energy stocks fell nearly 5% in 2023, while the S&P 500 index rose 24%. But their inflation-hedging credentials grew even more in 2022. The S&P 500’s energy sector rose about 60% that year, providing a bright spot in a stock market that had plummeted as the Federal Reserve raised interest rates to combat inflation that had reached a 40-year high. .
Morgan Stanley and RBC Capital Markets strategists reiterated their bullish view on energy stocks last week. RBC’s Lori Calvasina said in a note that geopolitical risks are rising and “there is growing acceptance that the economy is actually very strong.”
Analysts also note the relatively low valuation. The S&P 500’s energy sector trades at 13 times forward 12-month earnings, compared with about 21 times earnings for the S&P 500 as a whole, according to LSEG Datastream.
If tensions in the Middle East ease, or if global economic growth begins to falter, oil prices could take a hit, potentially clouding the outlook for energy stocks.
Conversely, strong economic growth could boost corporate profits and steer investors into other sectors that have performed well this year, such as industrials and financials. S&P 500 companies are expected to see profits rise 9% this year, according to LSEG IBES data.
Marta Norton, chief investment officer for the Americas at Morningstar Wealth, said the firm owns stakes in energy pipeline companies and other master limited partnerships (MLPs), which protect it from the robust effects of inflation. He said it was possible.
Still, he believes the economy could start to slow in the coming months, allowing the Fed to cut interest rates in June.
“What we’re seeing today is that the timing of the Fed’s policy change and how the economy actually slows down is really an open question,” Norton said. Ta. “You need to manage your portfolio to achieve different outcomes.”
