Investors are faced with a difficult decision after a scorching rally in U.S. Energy Shares.
S&P 500’s energy sector (.SPNY), has risen 55.7% year to date on the back of rising oil prices. This makes it a welcome counterweight to portfolios in a year when the S&P 500 (.SPX), has fallen by 13.3%.
A few energy companies have seen higher returns than those in high-flying technologies over the past decade. Exxon Mobil Corp (XOM.N), Chevron Corp. (CVX.N), have both gained 57% and 49%, respectively, while Occidental Petroleum Corp. (OXY.N.N.) has risen about 140%. The U.S. crude oil price has risen 53% over the past year, which is a boon for oil and gas shares as well as allowing them to fuel the highest inflation rates in decades.
Energy shares have survived hawkish pivots by the Federal Reserve and other central bank central banks so far. This has fueled concerns about slowing growth, which could impact energy demand. There are still signs that some investors might be making profits. The sector has seen an 11% increase since April but there have been five consecutive weeks of net outflows to energy sector funds, according Refinitiv Lipper data.
James Ragan, director for wealth management research at D.A. said that “the fundamentals have really improved this group this year.” Davidson. “If we go into a deeper recession globally, there are some risks that you could see some destruction of demand.”
Investors who remain committed to their energy bets point out the sector’s strong earnings prospects and historical low valuations. They also expect that oil prices will continue to rise following the conflict in Ukraine, which tightened supplies.
According to Refinitiv, the S&P 500’s earnings surpassed expectations in the first quarter. They are expected to more or double by 2022, compared to a 9% increase for the broad S&P 500.
According to Refinitiv Datastream, companies in 21-stock energy trade at 10x forward earnings estimates, compared with 15.5x long-term median, which is 15.5x. Comparatively, the S&P 500 trades at around 17 times.
In a recent note, Nicholas Colas, cofounder of DataTrek Research wrote that Energy stocks don’t have a secular story like Tech. Therefore, investors should only pay attention when these names are outperforming on the bottom line, and estimates are rising,” he said. “That’s happening now, and we expect it to continue given the low 2023 estimates.”
