(Bloomberg) — The rotation from technology stocks has investors, at long last, scouring one of the least loved corners of the market: energy producers.
Companies that drill for and refine oil and gas have badly lagged behind the broader market for the past three years. The S&P 500 Energy Index is up around 4% since the end of 2022 compared with the S&P 500 Index’s 79% surge. Range-bound oil prices that have crimped margins up and down the supply chain are largely to blame.
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While oil is expected to stay near current levels as global economic growth slows and a supply surplus persists, analysts see energy companies outperforming as investors look for gains outside of the technology space. A top allure for anyone worried about bloated valuations for some of the market’s biggest winners: energy is the cheapest sector in the S&P 500 measured by price to future earnings.
“People are kicking the tires on this sector now, they’re looking for diversification outside of AI,” said Adam Turnquist, vice president and chief technical strategist at LPL Financial. Energy is breaking through positive technical levels and currently offers market-leading breadth, which has “surprised” many investors, he added. “There’s more upside than expected, it’s a pretty low bar right now.”
Energy companies in the S&P 500 have rallied 19% since an April 8 low, but still trade below their high for the year. The rebound, though, has taken 77% of the companies in the index above their average price over the past 200 days. While that is usually a sign of excess, the group’s long-term sluggishness distorts the statistic.
The November selloff that took the S&P 500 more than 5% from its October high saw heavy selling in the tech sector and among momentum stocks. Investors poured money into value plays, seeking stability. That led to a net inflow into the State Street Energy Select Sector Fund, better known by its XLE ticker, last month for the first time in a year. The ETF, which includes the largest US energy producers, Exxon Mobil Corp. and Chevron Corp., also saw its largest positive inflow since July 2024.
Energy has also quietly been the second-best performing of 11 sectors in the market over the last two months, rising 7.4%.
“Now, it’s getting the point, after two months, that people need to pay attention, especially as we’re going into the new year,” said Matt Maley, chief market strategist at Miller Tabak + Co.
Even with oil prices stuck in the $50 to $60 range, Exxon Mobil’s guidance this week shows energy stocks can generate a lot of cash, Maley said, adding that the group is on the verge of “a major breakout” that would “surprise a lot of investors” given a bearish view on Wall Street.
“It’s over hated and underweighted,” he said of the oil stocks.
The energy sector’s woes have been enduring for years, as its weighting on the S&P 500 fell to the lowest point in at least the last two decades outside of the Covid-19 pandemic before its rally in the last two months.
Still, calls for a global slowdown abound, leaving some analysts cautious about the prospects for energy producers, particularly for oil.
“People are still very cautious into 2026, given a really bearish outlook for oil – it seems like we’re still going to have this supply overhang,” Stacey Morris, head of energy research at VettaFi, said by phone.
She’s more optimistic about gas producers. Improving commodity prices and fund flows into gas-tracking ETFs should bolster returns for that group. The First Trust Natural Gas ETF just saw four-straight months of positive net inflows for the first time since 2022.
While the rally in recent months has caught some attention, strategists haven’t rushed out to raise their views of the sector. “Fundamentals will have to get better for the rally to extend much longer,” Hugo Ste-Marie, Scotiabank director of portfolio and quantitative strategy, said in a Dec. 5 research note.
Many, however, are considering upgrading energy as a sector. “There’s still more work to do before we would go overweight energy stocks, but we’re getting closer to that point,” LPL Financial’s Turnquist said, noting he raised the group to neutral from underweight earlier this year. “We’re becoming increasingly optimistic on it.”
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