US energy shares, including oil and gas stocks, are surging as investors seek to protect their portfolios from inflation. The S&P 500 energy sector is up about 17% in 2024, outperforming the broader market. This growth is attributed to a 20% rise in U.S. crude oil prices and geopolitical instabilities [b544f08b]. Some investors believe rising energy shares could hedge against U.S. inflation. Energy stocks have risen as a U.S. equities rally has broadened beyond the growth and technology companies that led gains last year. Shares of miners, steel firms, and other commodity-linked companies have also risen along with energy stocks. The S&P 500 energy sector trades at 13 times forward 12-month earnings estimates compared to nearly 21 times for the overall S&P 500. Oil prices could take a hit if Middle East tensions ease, or if global growth starts to wobble, potentially clouding the outlook for energy shares. Conversely, strong economic growth could boost corporate profits and steer investors into other sectors that have done well this year, such as industrials and financials [b544f08b].
Investors are buying oil and gas stocks as a hedge against inflation. Oil stock buying has accelerated in recent weeks due to rising oil prices and a stronger-than-expected U.S. economy. The energy industry has been the second-best performer on the U.S. stock market this year, with oil and gas stocks up by 17% since January [446d1322]. Investors are attracted to the oil and gas sector as a hedge besides gold. Despite concerns about inflation and the prospects of economic growth, investors see that the economy still relies on oil. The situation in the Middle East, supply and demand dynamics, and the expectation of tightness in the oil market are driving the strong performance of oil and gas companies. Portfolio investors have accumulated one of the largest bullish futures and options positions in gasoline since before the pandemic. Despite the decline in oil demand growth during the first quarter, investors expect demand to exceed supply in the coming months. The future of oil and gas demand remains uncertain due to weak global activity, slowing growth, inflation, fiscal challenges, and rising debt. However, these factors do not necessarily indicate a decline in oil and gas demand and the stocks of companies in the sector [446d1322].
Portfolio managers are advising an overweight position in energy equities as a hedge against inflation, with Marathon Petroleum and Valero Energy cited as examples of substantial growth. The approaching earnings season has shifted the spotlight to energy shares, with Exxon Mobil and Chevron displaying resilience and strategic capital expenditure. Despite concerns over inflation and interest rate policies, investment experts from Morgan Stanley and RBC Capital Markets remain optimistic about energy stocks due to economic strength and rising geopolitical risks. However, challenges such as long-term sustainability, regulatory pressures, and the transition to renewable energy sources exist within the industry [928ec121].
Investors are also advised to consider investing in the Utility sector, particularly Electric Power Utilities, as they are expected to provide alpha to portfolios in the next 12-18 months. The electrification of the economy and rising overall electricity demand are driving factors for the sector's potential growth. US electricity demand is forecasted to rise by 1-3% annually over the next 10 years. Utilities operating in price-competitive markets with supply/demand imbalances are expected to benefit from rising market rates for power. Independent power producers (IPPs) and larger electric utilities with significant renewable energy or nuclear energy exposure are well-positioned. Companies related to nuclear power and those that support the Electric Utility industry are also expected to prosper. Investors are advised to consider investing in the Utility sector, with a favorable look at nuclear-related companies [55d677d4].
Hargreaves Lansdown investors have been buying dividend stocks BP and Shell. BP has a forecast dividend yield of 4.5% and Shell has a yield of 4%. The oil price has been rising steadily since the beginning of 2024, and recent geopolitical instability and production cuts by major producers have contributed to the rise in share prices of BP and Shell. Both stocks still look cheap relative to the market as a whole. However, investors should be aware that they have no control over the oil price and periods of negative sentiment can impact the stocks. The author, Paul Summers, is more interested in growth stocks at the moment and won't be investing in BP and Shell. Nevertheless, he believes they could be considered as core holdings in an income-focused portfolio [536e0a38].
Shell is considering switching its listing to New York as it feels the London markets are undervaluing its shares. Shell's stock currently trades at a lower price-to-earnings (P/E) ratio than most of its US counterparts. CEO Wael Sawan believes this is unjustified. The challenges of being listed in the UK include government interference and public sentiment. However, Shell has managed to produce returns on invested capital in line with its US counterparts over the last decade. Shell's reduced share price has allowed the company to generate strong cash flows, even after taxes. Shell's investors can benefit from share buybacks. Strategically, Shell is preferred over BP and US companies due to a 15% withholding tax on dividends from US companies. The short-term outlook depends on the oil price as the conflict in the Middle East develops [b7a44c0d].
Piper Sandler chief investment strategist Michael Kantrowitz discusses how utility stocks have the most stable earnings of any sector on 'The Big Money Show' on May 20, 2024 [100c24fa].
Diversified Energy Company PLC has announced that it will be included in the Russell 2000 Index effective July 1, 2024. The inclusion in the index is expected to expand the company's shareholder base and enhance trading liquidity. The Russell 2000 Index is widely regarded as a bellwether of the US economy and focuses on American small businesses. Diversified Energy is a leading publicly traded energy company focused on natural gas and liquids production, transport, marketing, and well retirement. The annual reconstitution of the Russell stock indexes captures the 4,000 largest US stocks based on market capitalization. Russell indexes are widely used by investment managers and institutional investors. FTSE Russell is a leading global provider of benchmarking, analytics, and data solutions for investors. [32c8ce84]
WNS (Holdings) Limited has also been added to the Russell 2000 Index as part of the annual reconstitution of the Russell stock indexes. The reconstitution became effective on July 1, 2024. WNS' addition to the Russell 2000 Index will expand its access to capital, enhance company visibility, and improve share price stability. WNS (Holdings) Limited is a leading Business Process Management (BPM) company with over 600 clients across various industries. As of March 31, 2024, WNS had 60,125 professionals across 65 delivery centers worldwide. Russell indexes are widely used by investment managers and institutional investors. About $10.5 trillion in assets are benchmarked against the Russell US indexes [12c7df56].