Energy stocks have seen a resurgence this year, with the S&P 500 index’s energy sector rising by approximately 17%, making it the second-best performing category of the benchmark index. This comes after a lackluster year for energy stocks in 2023, when concerns about the global economy led to a 5% decline in the sector. A surge in oil prices in 2024, driven by escalating tensions in the Middle East, has also helped boost energy stocks, with West Texas Intermediate crude futures settling at $85.02 a barrel and Brent crude futures settling at $89.74 a barrel. Some investors believe that energy stocks are poised for further gains due to ongoing geopolitical turmoil and the resilience of the US economy.
Nancy Curtin, global chief investment officer at AlTi Tiedemann Global, believes that energy stocks are attractive at the moment because they are cheap relative to the rest of the market. The energy sector trades at about 13 times its expected earnings over the next 12 months, compared to the benchmark index’s multiple of 21. With hot inflation data, a strong job market, and a resilient economy, traders are anticipating that the Federal Reserve is unlikely to cut interest rates until the second half of the year. While elevated interest rates are typically negative for stocks, shares of oil and gas companies tend to perform well in such environments. Energy is the S&P 500 sector that has shown the highest propensity to outperform when interest rates are high, according to RBC Capital Markets.
Some factors contributing to the positive outlook for energy stocks include production cuts by the Organization of the Petroleum Exporting Countries (OPEC) and its allies. Several OPEC+ countries have agreed to extend their voluntary production cut of 2.2 million barrels per day during the second quarter of 2024. However, not all energy stocks are expected to rise, as shares of clean energy companies have been struggling due to high borrowing costs. The iShares Global Clean Energy exchange-traded fund has slid roughly 11% this year, with individual companies like Plug Power, SolarEdge Technologies, and Enphase Energy experiencing significant declines in their stock prices.
Former President Donald Trump, who labeled himself “Tariff Man” in 2018, has expressed intentions to pursue a more aggressive trade strategy if re-elected in November, including enacting tariffs on imports from China and other nations. Economists are warning that Trump’s trade agenda could have negative impacts on the US economy, including worsening inflation, job losses, slowed growth, and spooking investors. Some economists fear that these policies could even set the stage for a recession, as tariffs are known to shrink the economy and make consumers poorer. The prospect of a trade war with China and other trading partners could have far-reaching consequences for the US economic outlook.
A key US inflation gauge, the Producer Price Index, has shown a marked increase last month, reaching its fastest pace since April 2023. The index rose by 2.1% for the 12 months ended in March, up from a 1.6% gain in February. While the increase was slightly lower than expected, it highlights persistent price pressures at the wholesale level, indicating that inflation remains a concern. The acceleration in prices that producers pay for goods and services suggests that inflation may continue to be a challenge, potentially leading to higher interest rates for a longer period. The core index, which excludes food and energy, also saw an increase, rising to 2.4% annually, supporting fears of prolonged inflation and higher interest rates in the future.
