Amid a recent broad rally in the U.S. stock market, energy shares find themselves left behind, prompting bullish investors to anticipate a potential rebound driven by upcoming earnings reports and escalating geopolitical tensions.
The energy sector has experienced a nearly 3% decline since late October, contrasting with the S&P 500’s 16% surge during the same period. While the benchmark index achieved a 24% rise throughout 2023, the energy sector suffered a 4.8% drop, marking the second-largest decline among S&P 500 sectors.
Despite the economic optimism that has benefited other economically sensitive groups like banks and small-cap stocks, energy shares have struggled, primarily due to a significant downturn in oil prices. The sharp decline in U.S. crude, down over 20% since late September to around $73 a barrel, has been influenced by ample supplies, particularly in the U.S., and concerns about subdued demand in China and Europe.
Matthew Maley, chief market strategist at Miller Tabak, notes that oil prices have been leading energy stocks, suggesting that a breakout in oil prices could quickly propel the energy sector to catch up.
Wells Fargo Investment Institute (WFII) recently upgraded its rating on the energy sector from “neutral” to “favorable,” citing expectations that “oil prices will bottom with the global economy and then finish the year higher.” Factors such as potential Middle East tensions and OPEC actions on production could influence near-term oil prices.
Recent events, including air and sea strikes by the United States and Britain on Houthi targets in Yemen, led to a spike in U.S. crude prices. WFII strategists highlight the historically cheap valuations of energy shares, trading at around 10 times trailing earnings compared to the overall S&P 500’s trailing P/E ratio of 22 times.
Upcoming quarterly earnings reports, particularly from oil services firms like SLB (formerly Schlumberger), Baker Hughes, and Marathon Petroleum, are expected to play a crucial role in shaping the energy sector’s trajectory. While the energy sector is projected to have the worst full-year earnings performance in 2023, falling nearly 26%, a 1.6% earnings increase is anticipated in 2024.
Walter Todd, chief investment officer at Greenwood Capital, emphasizes the appealing valuations and improving earnings trends as factors supporting energy shares. The potential for the sector to serve as a hedge in the face of rising geopolitical tensions is also considered.
However, some investors remain cautious. Robert Pavlik, senior portfolio manager at Dakota Wealth Management, views oil as fairly priced, expressing concerns about the U.S. economic slowdown and skepticism regarding lasting boosts from Middle East conflicts. Pavlik maintains slightly less than market exposure to energy shares, favoring sectors such as industrials and technology.
In conclusion, U.S. energy stocks face challenges but are closely watched for signs of a potential rebound, influenced by both earnings performance and geopolitical developments.
