- Experts say investors have overlooked the strong potential of energy stocks because of their solid fundamentals based on valuations.
- Energy stocks' recent rally has broken through key resistance from the 2022-2023 peak.
- Geopolitical risks and macroeconomic factors will drive further growth in sector stocks.
While technology seems to be gaining traction in the stock market, investors should look to less flashy sectors that are ripe for big gains amid bullish tailwinds.
Market experts say energy stocks deserve more attention. The sector is off to a strong start this year, with the S&P 500 Energy index returning 16.3% through 2024. But top Wall Street economist David Rosenberg said: He said investors have yet to take advantage of the sector's favorable position in the market.
“This is an overlooked part of the market because investor positioning is so negative ($2.7 billion outflows from the SPDR Energy Sector ETF in the past year). This is a contrarian positive.” Rosenberg told Business Insider in an email Friday.
Market players say there are three big reasons why energy stocks could rise further this year, with analysts seeing the sector rising as much as 20% from current levels.
strong fundamentals
Just as tech stocks are rising on strong earnings, LPL Financial reported impressive earnings revisions for Nort Energy, which topped all S&P 500 sectors in March and improved its first quarter. It was a timely reminder for investors as earnings season begins.
“We believe the sector is poised to outperform expectations solidly due to favorable revisions, coupled with rising oil prices, and if capital allocation decisions by producers improve. , which should increase the likelihood that the sector's gains will be accepted by the market, but despite the strong U.S. economy, the dollar may pose a bit of a challenge in the short term,” said Jeff Buchbinder and Colby of LPL Financial. – Mr. Hesson wrote in a memo this week.
Rosenberg said recent increases in oil prices could mean better performance for refiners and higher sales for exploration and production companies.
The energy sector has made the most significant earnings estimate revisions in the past month. Source: LPL Research, FactSet 04/08/24
“sustained rise [in prices] It also means that capital investment in this sector will increase, leading to investments in storage, transport and equipment infrastructure, which will be a tailwind for these sub-sectors of the energy sector. ”
As energy companies look to cash flow for richer dividends, share buybacks and debt reduction, Buchbinder and Hesson predict that the sector's valuation will increase, in line with Rosenberg's prediction. I expect it to rise.
“our strategist The energy rating subcomponent of the model is in the 55th percentile on an absolute basis and in the 11th percentile when compared to the S&P 500,” Rosenberg said.
High technical ability
The energy sector rebound has broken through key resistance levels from the 2022-2023 peak, and Buchbinder and Hesson said the breakout was confirmed by bullish momentum and broad buying pressure.
“More than 90% of sector stocks are currently trading above their 200-day moving average, and nearly half of the sectors hit new 52-week highs earlier this month. Based on the size of their historical consolidation ranges, , the technical floor price objectively suggests an additional ~20% upside from current levels,” they wrote.
April is the prime time for the season, as energy consumption typically spikes for the summer driving season. The S&P 500 Energy Sector Index has an average return of more than 3.7%, with a 70% probability of a positive return based on historical data, and Rosenberg said this momentum will continue into May.
“While seasonality remains favorable, we believe the sector's strong risk-reward profile will drive returns in the coming months. Our focus on recommendations from a 12-month perspective “We've seen very high screening in the energy sector recently in our model and it's attractive, so we think that momentum will continue,” he said.
macro driver
With fighting escalating in the Middle East and the conflict between Russia and Ukraine showing no signs of ending, these geopolitical uncertainties, combined with OPEC+ production cuts, will continue to drive oil demand and prices higher, LPL said.
Rosenberg agreed that this is a new driver for the rise in energy stocks, but warned that the biggest risk to the sector is a decline in aggregate demand as growth occurs.
On the monetary policy front, Buchbinder and Hesson noted that the sector could be protected from persistently high inflation and long-term interest rates.
They note that energy stands alone as the only sector to be positively correlated with 10-year Treasury yields, offering investors a potential portfolio hedge against rising interest rates.
