Energy Stocks, Surprising Leaders

Key takeaways

  • While many of last year’s themes continue to dominant markets, there is one thing that is different: the energy sector.
  • Year-to-date, the U.S. energy sector has posted a 10% gain, roughly in-line with the broader market.
  • Russ believes there are several factors supporting the sector including elevated commodity prices and elevated inflation, as well as valuations and its role as a hedge.

Equities have recovered from their April slump and are once again posting new highs. While the rally has broadened, several of last year’s themes, including artificial intelligence (AI) and semiconductors, continue to lead. However, there is one change to note: Unlike last year, when it dramatically underperformed, the energy sector is holding its own so far this year. My own view is that the sector can continue to advance.

Several factors support further gains, including a surge in commodity prices, still elevated inflation, cheap valuations, and the sector’s role as a hedge against geopolitical uncertainty.

Sticky inflation, surging commodities

Energy stocks are benefiting from a resilient economy which has, in combination with select supply constraints, supported the broader commodity complex. Year-to-date, the S&P GSCI Commodity Index is up more than 10%. Depending on the universe, crude oil is up roughly 10%, with other parts of the energy complex, notably gasoline, posting solid double-digit returns.

This rally in commodities is occurring against a backdrop of still elevated inflation. While price gains have decelerated, both core and headline inflation remain comfortably above 3%. This is important as the sector’s performance tends to move with both expected and realized inflation.