Energy Sector Heating Up: Potential for Continued Growth
The energy sector is once again gaining momentum, with stocks becoming a popular choice. There's a potential for further growth in this rally.
Energy stocks are once again popular, gaining attention in the market. If you want to learn more about this story, it was originally featured in CNN Business’ Before the Bell newsletter. If you're not already a subscriber, you can easily sign up here. Additionally, you can listen to an audio version of the newsletter by clicking on the same link.
The energy sector of the S&P 500 index has seen a strong increase of about 17% this year, making it the second-best performing category after communication services. Marathon Petroleum's shares have risen by 43%, Exxon Mobil's by 22%, Occidental Petroleum's by 16%, and Halliburton's by 13%.
These significant gains follow a challenging year for energy stocks. In 2023, the energy sector experienced a decline of approximately 5%, underperforming the overall S&P 500 index due to concerns about the global economy impacting energy demand. This was a contrast from the previous year, when energy stocks surged over 59% following Russia's invasion of Ukraine, pushing crude prices above $100 a barrel.
Oil prices have surged this year, partly due to tensions in the Middle East, supporting energy stocks. West Texas Intermediate crude futures closed at $85.02 per barrel, while Brent crude futures settled at $89.74 per barrel.
Investors believe that energy stocks could see further growth, as geopolitical unrest persists and the US economy remains strong. Energy stocks tend to perform well during periods of economic strength, as there is increased demand for energy to support the production of goods and services.
Nancy Curtin, global chief investment officer at AlTi Tiedemann Global, believes that energy stocks are currently a good investment choice. This is because they are relatively inexpensive compared to the overall market. The energy sector's expected earnings over the next year are valued at around 13 times, which is lower than the benchmark index's multiple of 21.
Recent strong inflation data, a robust job market, and a resilient economy have led traders to speculate that the Federal Reserve is unlikely to lower interest rates until the second half of the year. High interest rates can have a negative impact on stocks as they increase the cost of borrowing money and raise consumer prices for items such as gasoline and groceries.
Oil and gas company stocks usually perform well when interest rates are high. According to data from RBC Capital Markets dating back to 2010, the energy sector in the S&P 500 has the highest likelihood of outperforming during periods of elevated rates.
Bob Doll, the CEO of Crossmark Global Investments, pointed out that in times when the market is expensive and the economic outlook is uncertain, the key factor for success is cash flow, which the energy sector has in abundance.
Production cuts by OPEC and its allies are predicted to boost crude prices. In March, several OPEC+ countries agreed to continue their voluntary production cut of 2.2 million barrels per day throughout the second quarter of 2024.
However, not all energy stocks are projected to increase. Clean energy companies, which are often expanding businesses seeking capital, faced challenges in 2023 due to high borrowing expenses.
2024 has seen a continuation of the downward trend. The iShares Global Clean Energy exchange-traded fund, which monitors various sectors like renewable electricity and solar energy, has dropped by approximately 11% this year. Additionally, Plug Power shares have fallen by 34%, SolarEdge Technologies shares by 25%, and Enphase Energy shares by 8%.
Trump's tariff proposals have the potential to harm job opportunities and escalate inflation.
Tariff Man might make a comeback in the White House next year, and he's planning for a sequel that's even grander than before. Former President Donald Trump, known as "Tariff Man" in 2018, has expressed his desire to implement a more forceful trade approach if he wins the election in November. Trump has proposed a 10% tariff on all imports, a 60% tariff on imports from China, and a 100% tariff on foreign cars, including those from Mexico.
My colleague Matt Egan reports that Trump's proposals could trigger a new trade war with China and possibly other countries.
Economists caution that Trump's trade agenda and any resulting retaliation from trading partners could negatively impact the US economy. This could lead to increased inflation, job losses, slower growth, and nervous investors.
Economists are concerned that these policies could potentially lead to a recession in the worst-case scenario. According to Alex Durante, an economist at the Tax Foundation, tariffs can have negative effects on consumers and the economy. He mentioned in an interview with CNN that this could be the most harmful aspect of a Trump 2.0 economic agenda.
Read more here.
US wholesale inflation heated up again last month
A key US inflation gauge rose at its quickest rate last month since April 2023, indicating that underlying price pressures continue to be strong. According to data released on Thursday by the Bureau of Labor Statistics, the Producer Price Index, which is a widely followed indicator of inflation at the wholesale level, increased by 2.1% for the 12 months ending in March. This is up from a 1.6% gain in February.
The annual increase in US wholesale prices was lower than expected, with FactSet consensus estimates predicting a 2.3% rise. Despite this, the acceleration in the prices producers pay for goods and services underscores the ongoing presence of inflation. This suggests that bringing inflation down will be a challenging task, and it also fuels concerns that interest rates will remain elevated for an extended period of time.
Looking at the monthly data, US wholesale prices saw a modest increase of 0.2%, a significant slowdown compared to the 0.6% growth recorded in February.
The closely watched "core" index increased for the third month in a row, reaching 2.4% annually after excluding volatile food and energy components. This was higher than the previous month's 2.1%. On a monthly basis, the core PPI slowed down as expected to 0.2% from 0.3%.
Economists had predicted that the core PPI would rise by 2.3% annually.
Read more here.
Editor's P/S:
The resurgence of energy stocks has been fueled by geopolitical tensions and a strong US economy, resulting in significant gains for industry giants like Marathon Petroleum, Exxon Mobil, and Halliburton. Despite a challenging 2023, these stocks are poised for further growth due to persistent geopolitical unrest and a resilient economy. The energy sector's relatively low valuation compared to the broader market and its historically strong performance during high-interest rate periods make it an attractive investment option.
However, the article also highlights concerns surrounding former President Donald Trump's proposed tariff policies. If implemented, these policies could escalate inflation and trigger a new trade war, negatively impacting the US economy. Economists warn that such policies could exacerbate inflation, lead to job losses, and potentially trigger a recession. It is crucial for investors to carefully consider the potential risks associated with Trump's tariff proposals and their implications for the overall market outlook.
