By Jacob Sonenshine
Oil stocks, which have risen since the start of the Iran war in late February, are starting to look tapped out.
Historically, those stocks have been seen as leveraged plays on the price of the commodity. Higher oil prices boost revenue and profit margins as a company's fixed costs remain stable. Profits will rise faster than the price of the substance, often sending shares upward faster than oil futures.
That hasn't been the case more recently, partly because the stocks have nearly quadrupled since their pandemic bottoms.
To see how things have changed, start with a look at the State Street Energy Select Sector SPDR Exchange-Traded Fund. Home to oil producers such as Exxon Mobil, Chevron and ConocoPhillips, and oil services companies such as Halliburton, the ETF is up 6% since just before the war started Feb. 28.
Currently at just over $59, it hit a record high of just over $62 last week. Driving the gain has been a 50% rise in the price of Brent crude oil. When oil spiked a bit more than 6% in one day in early March, the energy stock ETF rose 2%. After the stocks rallied over the following few weeks, they ran out of steam.
Oil popped 8% Thursday, but the stocks gained just 0.5%, a larger difference. This suggests the stocks have already reflected most of the higher crude price and would need a much larger gain in oil from here to go substantially higher.
That's far from a guarantee. The continuous Brent crude futures contract has remained in a range between $97 and $112 for weeks, showing selling pressure builds -- and knocks the price lower -- when it approaches the high end of the range. Breaking above $112 may very well require a new development that makes the war in Iran look worse, further restricting the supply of oil. Right now, it seems the futures market has already priced in the fact that the Strait of Hormuz is essentially closed.
Plus, interest rates have crept higher. The Federal Reserve likely won't cut rates again soon, as it tries to tamp down consumer demand and inflation, another headwind for oil prices.
If oil has topped out, oil stocks are certainly close to topping out. History proves it. When the oil stock fund hits new records dating back to 2000, its average move for the following six months is up 0.8%, according to Dow Jones Market data. Its average move for the following year is just over 3%, and it tends to drop almost 3% for the following two years.
When it hits a record in the later stages of an economic expansion (meaning after several years of economic growth and closer to when the Fed must hike rates), it tends to see fierce drops. After every record high in 2008, it went on to drop over 40% for the following six months. In 2014, after years of postcrisis growth -- and as the Fed was nearing an interest-rate hike -- the fund went from record highs to dropping double digits in just a few months.
Consistent with this, the stocks' valuations look too expensive. The ETF trades at 18 times analysts' expected earnings for the coming 12 months, not far from the S&P 500's 20 times, whereas the ETF has often sat 8 or 9 points below the market's P/E multiple.
What's more, the stocks are trading at evaluated multiples of earnings estimates that have already risen. Analysts have lifted their 2026 earnings estimates by 18% in aggregate for companies in the fund since the end of February, according to FactSet.
They're not certain that oil prices can sustain their current levels, which is why the profit forecasts haven't risen more than that. Sure, earnings estimates could inch higher as long oil remains around current levels for a few weeks, writes Seaport Research Partners chief U.S. equity strategist Jonathan Golub. But estimates likely aren't heading substantially higher.
Looking at earnings estimates, Golub points to the fact that the oil futures market still reflects a drop-off in prices beyond 2026 -- and much slower earnings growth for energy companies next year.
So what should investors do now? Sell oil stocks. The gains have been handsome, so there's nothing wrong with taking profits, especially with all the good news on energy already behind the market.
Tons of other areas of the market have lagged behind oil and could catch up. Technology is one area to consider, as are select names in consumer staples and healthcare.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 03, 2026 12:12 ET (16:12 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
