Energy stocks rose in Wednesday trading. Occidental, Exxon Mobil rose 2%; Schlumberger, Chevron rose 1.5%.
Energy stocks are leading the market this year, which may say more about the market than it says about energy stocks.
Energy is the leading sector in the S&P 500, rising 8.9% for the year. Healthcare was second at 5.6%, with most other sectors far in the rear. The overall S&P 500 is down 1.8%.
Energy’s gains are surprising because oil prices have fallen about 4% this year. Forecasts of earnings for the largest names in the sector are heading lower, so the gains are based almost entirely on investors bumping up the valuations of the stocks. They are ready to pay more for less earnings growth.
Energy appears to be attracting investors fleeing the problem areas of the market, like tech and consumer discretionary stocks. Being the “best house on a bad block” can lead to outperformance, but in this case it looks fleeting.
The main stocks still tend to trade with oil prices, which look shaky. Starting next month, OPEC and its allies will start to restore some production that they had been holding off the market to boost prices. Even Goldman Sachs, which has been steadily bullish about oil prices, is less upbeat. With “recession risks rising and elevated spare capacity, medium term risks to our price forecast remain to the downside,” wrote analyst Callum Bryce.
Exxon Mobil, the largest U.S. energy stock, is up 9% this year and now trades at 15.5 times its expected earnings over the next four quarters, up from 13.5 times at the start of the year. What makes that particularly surprising is that analysts have been cutting their estimates for Exxon’s 2025 earnings since the start of the year. They now see the company earning $7.47 per share, down from $7.96 on Dec. 31.
Chevron is up 13% despite analysts’ earnings estimates also coming down.
John Gerdes, an analyst at Gerdes Energy Research, said in an interview that investors appear to be making two calculations. First, they are gravitating to energy as an alternative to sectors that are more risky today. “We have other areas of the market where there’s some loss of confidence, so you’re seeing some rotation there,” he said.
Energy is exposed to policy risk today, including from tariffs, but the valuations of the stocks are fairly low compared with other sectors. Dividends are relatively high. “You’ve got substantial dividend support,” Gerdes said. The stocks he covers have an average dividend yield of 3.1%.
A second factor is that investors appear to be somewhat more optimistic about oil’s long-term future, Gerdes said. Near-term oil futures are more expensive than oil for delivery years from now, but the gap has been narrowing lately, reflecting a more upbeat view of future demand. It implies that investors have more confidence in oil demand in the future, which should help energy stocks in coming years, Gerdes said.
The spread between futures expiring in a month and futures expiring in December 2027 has narrowed to $5.84 from $7.38 at the start of the year. The change may be a sign of a “Trump bump”—that the president’s actions to boost oil companies and reduce support for renewables are making investors more confident that oil will be around for years to come. Europe is also getting somewhat more positive about oil and gas.
The oil age may last longer than expected. The energy-stock rally likely will be different.
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