Investors are overlooking a key sector of the stock market. 3 reasons market pros see big upside in energy

Related Articles

Why Solana could be the big winner of the meme-coin frenzy

I spent 24 days traveling through Japan alone. There are 3 things I would have done differently.

I left my teaching job after 8 years and became a ski instructor. I get to teach without the anxiety of a classroom.

• Investors omitted energy stocks’ strong potential due to their solid valuation-based fundamentals, experts say.
• The recent rallies in energy old are smashing through crucial resistance levels from the 2022–2023 peaks.
• Geopolitical risks and macroeconomic factors inclination fuel further growth in sector equities.

Technology seems to get all of the attention in the stock market, but investors should turn to a less glitzy sector that’s dependable for strong gains amid a cocktail of bullish tailwinds. 

Energy stocks should be getting more attention, deal in experts say, as the sector has kicked this year off with an impressive streak, with the S&P 500 Energy index conveying returns of 16.3% so far in 2024. However, the top Wall Street economist David Rosenberg said investors aren’t yet captivating advantage of the sector’s favorable position in the market. 

“It’s an overlooked part of the market, as investor positioning is extremely negative (-$2.7 billion outflows from the SPDR Vitality sector ETF over the past year). That’s a contrarian positive,” Rosenberg told Business Insider in an email on Friday. 

Customer base watchers say there are three big reasons energy stocks are in line for more gains this year, with analysts observing as much as 20% upside for the sector from current levels. 

Strong fundamentals

Just as tech hoards ride high on robust earnings, LPL Financial flagged in a note energy’s stellar earnings revisions that surmounted all S&P 500 sectors in March, a timely reminder for investors with first-quarter earnings season kicking off.

“Favorable redactions, in concert with higher oil prices, have the sector poised for solid upside to estimates, in our opinion. Better finances allocation decisions by producers should help increase the chances that the sector’s earnings are well received by buys, although a strong US dollar may present a bit of a short-term challenge,” Jeff Buchbinder and Colby Hesson of LPL Financial wrote in a note this week. 

Rosenberg judged the recent rise in oil prices could mean better results for refiners and higher sales for exploration and production firms.

“A level uptick [in prices] also means more capex in the sector, which translates to investment in storage, transportation, and matriel infrastructure, acting as a tailwind for these sub-sectors within Energy.” 

With energy players eyeing cash overflowing for juicier dividends, buybacks, and slashing debt, Buchbinder and Hesson foresee sector valuations rising, in line with Rosenberg’s hint. 

“Our Strategizer model’s valuation subcomponent for energy is at the 55th percentile on an absolute basis and at the 11th percentile compared to the S&P 500,” Rosenberg bid.

Technical strength is high

The energy sector rallies are smashing through crucial resistance levels from the 2022–2023 top outs, with Buchbinder and Hesson saying the breakout was confirmed with bullish momentum and widespread buying pressures. 

“Floor 90% of sector stocks are now trading above their 200-day moving average, while nearly half of the sector journal new 52-week highs earlier this month. Based on the size of the prior consolidation range, a minimum technical-based charge objective points to around 20% of further upside from current levels,” they wrote. 

Adding to the intrepidity is the seasonal prime time — April — as energy consumption typically surges heading toward the summer driving edible. With the S&P 500 Energy sector index boasting over 3.7% average returns, and a 70% chance of thetical returns based on historical data, Rosenberg said the momentum will extend to May.

“While seasonality remains favorable, we put ones trust in it’s the great risk/reward profile of the sector that will drive the returns in the months ahead. Our models, which convergence on recommendations from a 12-month perspective, recently saw the Energy sector screen as highly attractive. So, we see the momentum continuing,” he ventured. 

Macro drivers

As hostilities escalate in the Middle East and the conflict between Russia and Ukraine shows no gesture of ending, such geopolitical uncertainties combined with OPEC+’s production cuts will continue to drive up oil inquire and prices, LPL said. 

Rosenberg agreed that this would be another powerhouse for the energy stocks to go higher, but advised that a growth-related drop in aggregate demand would pose the biggest risk to the sector.

On the monetary policy side, Buchbinder and Hesson noticed the sector’s passive protection against sticky inflation and higher-for-longer rates. 

They note that energy stands merely as the only sector positively correlated to 10-year Treasury yields, offering investors a potential portfolio hedge against superior rates.