TL;DR: The possibilities of energy stocks providing a comeback to last year's fantastic run are being weighed down by a likely US recession and difficult comparisons to a great 2022.
Big Oil's Bull Run on Wall Street
The grey clouds looming over Wall Street during the past year allowed some shimmers of hope as energy stocks delivered a stunning encore to last year's run. It was noted that the S&P 500 energy sector's (.SPNY) year-to-date gain is 4.2%, slightly behind the increase for the overall index (.SPX). In 2022, a year that was otherwise terrible for equities and saw the S&P 500 decline 19.4%, the sector witnessed a 59% increase. This has been the first time this sector has seen such good outcomes since 2013.
Advocates of the energy sector argue that guaranteed gains would be seen in this industry for the next three years. Also, the price-to-earnings ratio currently stands around ten times, against 17 times for the market comprehensively. Many of the firms in this sector have high dividend yields; for instance, this week, Chevron (CVX.N) shares increased by about 5% following the company's announcement that it would be purchasing $75 billion worth of its stock, reinforcing potential gains for shareholders.
Impending Recession?
However, with this year's entrance, the fear of recessions in the United States looms heavily. There are chances of combative rate increases and inflation. It is hard to say what the future holds for the economy regarding energy stocks. With continuous fluctuations in oil prices, it is evident that oil is a very volatile commodity. Especially with the ongoing conflict between Russia and Ukraine, the oil will be impacted.
We cannot overlook that the world is also moving toward cleaner energy sources. In 2022, President Joe Biden signed the Inflation Reduction Act into law, allocating $369 billion for the funding and advancement of greener energy alternatives in the fight against climate change. This portrays a dubious future for the energy sector after an exceptional performance at the New York Stock Exchange last year.
However, one might argue that we see that American energy companies are looking to benefit, especially in terms of price hikes (as that permits them more revenue) and the consequent increase in energy stocks.
Nevertheless, chances are more that energy will do just okay compared to other areas that have performed much poorer. However, for an average trader, it could be much safer to invest in areas pertaining to consumer discretionary and industrials. Also, with technological innovation in oil, prices have been going down for a decade, so a safer bet in terms of stock is more towards clean energy.
Energy stocks have been a hot topic in the financial world, particularly on Wall Street. The S&P 500 energy sector's year-to-date gain is 4.2%, which is slightly behind the increase for the overall index. However, in 2022, the sector witnessed a 59% increase, a remarkable comeback after a terrible year for equities. This rise has been the first time since 2013 that the energy sector has seen such significant gains.
Price-to-Earnings Ratio in the Energy Sector
The price-to-earnings ratio is a useful metric that can help investors determine if a stock is undervalued or overvalued. Currently, the energy sector's price-to-earnings ratio stands around ten times, against 17 times for the market comprehensively. This lower price-to-earnings ratio in the energy sector suggests that the market may be undervaluing these stocks. Furthermore, many of the firms in this sector have high dividend yields, making it an attractive option for income-seeking investors.
However, the energy sector's future may not be as bright as it seems. The fear of recessions in the United States is looming, and there are chances of combative rate increases and inflation. With continuous fluctuations in oil prices, the energy sector remains a volatile commodity. Moreover, the world is moving towards cleaner energy sources, which portrays a dubious future for the energy sector after an exceptional performance at the New York Stock Exchange last year.
Clean Energy vs. Oil Prices In 2022
President Joe Biden signed the Inflation Reduction Act into law, allocating $369 billion for the funding and advancement of greener energy alternatives in the fight against climate change. This signifies that the world is moving towards cleaner energy sources, which could reduce the demand for oil. Moreover, the ongoing conflict between Russia and Ukraine could further impact oil prices, making it a challenging investment option.
Investing in Consumer Discretionary and Industrials For an average trader, investing in areas pertaining to consumer discretionary and industrials could be much safer. The consumer discretionary sector includes companies that produce non-essential goods and services such as apparel, entertainment, and automobiles. Whereas, the industrials sector includes companies that manufacture machinery, equipment, and provide infrastructure services. These sectors have performed much better than the energy sector, making them a safer bet for investors.
Innovation in the Energy Sector
However, it is worth noting that American energy companies are looking to benefit from price hikes and the consequent increase in energy stocks. Technological innovation in the energy sector has led to a decade-long decline in oil prices, making it a more affordable and competitive option for consumers. Therefore, companies that invest in new technologies could continue to perform well in the energy sector.
To conclude, the energy sector's future is uncertain, and it may not be the safest investment option, given the ongoing volatility in oil prices, fears of a recession, and the world's shift towards cleaner energy alternatives. While investing in the energy sector may offer high dividend yields, other sectors such as consumer discretionary and industrials have performed much better and could be a safer bet for investors. However, innovation in the energy sector could still lead to potential gains for shareholders.