Energy stocks have surged over the past year, rising 67.4% since the end of 2021. What’s even more impressive is that run has come in the context of a bear market in most stocks. The S&P 500 is down almost 17% over a similar holding period, so energy’s outperformance stretches to more than 80 percentage points, details Elliott Gue, editor of Energy and Income Advisor.
It’s only natural, and logical, to wonder whether energy might be due for a pause after a run of that magnitude, or whether energy stocks might be getting expensive in absolute terms and relative to the broader S&P 500.
First, a word of warning.
As we’ve written extensively in recent issues of Energy and Income Advisor, we find it unlikely – almost implausible – that energy stocks would remain totally immune to a broader risk-off move in equities amid a U.S. recession. Oil and natural gas prices are driven by the cycle, and the three interrelated fundamentals of supply, demand, and price.
If the economy enters recession, and particularly if that downturn is global, oil and natural gas demand will fall and that’s likely to loosen supply and demand conditions at least temporarily, keeping a lid on prices.
The good news is that concerns about equity markets over the next few months aside, energy remains the cheapest, and best-placed sector in the S&P 500. If historical relationships persist as we expect, energy stocks are likely to continue beating the S&P 500 for years and may be one of the few sectors to provide positive real (inflation-adjusted) returns and income over the next 5 to 10 years.