There is a case to be made that inflation is not going away anytime soon. The Federal Reserve is raising rates, which could prop up oil prices for the foreseeable future, and energy stocks and other commodity-sensitive sectors could lead the market for a sustained period, just as big tech did for the past decade.
And as long as oil prices remain relatively high, that bodes well for profits for major oil producers, drillers and other companies with exposure to crude.
“Given the jump in oil and gas prices this year, it will likely not be a surprise to anyone that the energy sector is expected to report the largest earnings growth for the first quarter,” Wade Fowler, senior portfolio manager at Synovus Trust Company, said in a report last week.
Oil stocks still have a ways to go to catch up with tech
Energy stocks currently make up just a small segment of the overall market, about 4.4% of the S&P 500, according to data from Bespoke Investment Group. Tech, despite its recent slump, still makes up about 28% of the index. There’s a long way to go for the oil sector to catch up.
Bespoke noted in a recent report that the gap should narrow further, and investors shouldn’t rule out the possibility that energy stocks could regain a bigger leadership role in the broader market. The analysts pointed out that after the tech stock crash of 2000, energy stocks eventually matched tech’s weighting, although not until 2008.
“We’re not suggesting that Energy is set to get back in-line with Tech like it did in the mid-2000s when commodities had a huge bull run after the Dot Com crash,” the Bespoke analysts wrote, “but it’s certainly not impossible either.”