Topline
The stock market closed out its worst quarter since the pandemic-induced market crash in early 2020 on Thursday, but a resurgent energy sector fueled by spiking oil prices has posted a stunning rally, with experts predicting the surge will only continue amid heightened inflation and rising interest rates.
Legendary investor Warren Buffett plowed into this crop of formerly hard-hit stocks during their … [+]
Key Facts
Though the broader S&P 500 slumped 4.9% in the first quarter, the S&P 500 Energy index has skyrocketed nearly 40%, eclipsing the second-best gain of 4% (by utilities) and marking one of only three sectors in positive territory.
The S&P’s decline since January has “sobered up” bullish investors, but the energy sector has pulled off a “meteoric ascent,” Bank of America’s Savita Subramanian said in a note to clients last week, predicting the sector should continue to outperform even if geopolitical risks subside and heightened inflation continue.
Headlining the sector’s stunning first-quarter runup, top S&P stock Occidental Petroleum skyrocketed more than 98% for its best quarter ever, buoyed by a new nearly $1 billion investment earlier this month from legendary investor Warren Buffett’s Berkshire Hathaway, the oil giant’s biggest shareholder.
Last week, BMO Capital analyst Phillip Jungwirth upgraded Occidental shares to reflect higher oil prices, while also applauding the firm’s “ambitious and visionary” plan to achieve net-zero emissions before 2040—echoing praise from Buffett, who last month said Berkshire “bought all we could” after being impressed by CEO Vicki Hollub on Occidental’s latest earnings call.
Though energy stocks crashed as pandemic lockdowns tanked oil demand in the first quarter of 2020, the sector has now more than recouped those losses: Of the S&P’s 10 best-performing stocks this quarter, seven hail from the energy sector, with Halliburton, Apa and Marathon surging 67%, 55% and 55%, respectively—reaching their highest levels in nearly four years.
With oil prices still above $100 per barrel, energy stocks could fall victim to a “knee-jerk” selloff in the event tensions between Russia and Ukraine deescalate, but stock prices are still near record lows relative to profits, and the sector is also working to attract socially minded investors with decarbonization plans (like Occidental’s) and incentives, says Subramanian.
Key Background
Oil prices have been on a wild ride over the past two years, fueling volatility among energy stocks that tend to move in tandem. Prices seeped into negative territory for the first time in history during the spring of 2020, when Covid lockdowns led to a glut in supply that became too expensive to maintain. Though the S&P returned to new highs within six months, oil prices didn’t recover. ExxonMobil, the nation’s largest oil company, ended the year as one of the worst-performing stocks, plunging 40%. Fast forward to 2022, and rising energy prices have fueled the highest inflation in 40 years. Ahead of President Joe Biden’s ban on Russian oil imports this month, oil prices spiked to a nearly 14-year high. Exxon’s up 36% this year.
Tangent
The reopening economy and massive fiscal stimulus helped fuel one of the strongest starts to a bull market ever, thanks largely to low interest rates, LPL Financial’s Jeff Buchbinder said in emailed comments. Now, with the Federal Reserve raising rates and unwinding its economic support, stocks—and particularly those in technology—are struggling. The communication services sector, which includes Facebook-parent Meta and Alphabet, has plunged 10% this year, while the information technology sector has slumped 8.5%.
What To Watch For
Though rising oil prices have been a boon to energy firms, some analysts are worried their implications could stunt economic growth. In a note to clients this month, Bank of America’s Ethan Harris said he worries stronger-than-anticipated Fed tightening, combined with an oil price shock or other unforeseen event, would pose a “serious risk” of a recession. On Monday, the bank said it expects faster rate hikes in light of sustained inflation and lowered its forecast for gross domestic product growth next year to 1.8% from 1.7%, compared to 5.7% last year.
Further Reading
Why Investors Like Warren Buffett Are Still Buying Energy Stocks Despite The Highest Prices In Years (Forbes)
As Biden Bans Putin’s Oil, What Are The Alternatives? (Forbes)
Top Energy Fund Manager Says To Ride Out The Oil Spike In Canada (Forbes)
Source: https://www.forbes.com/sites/jonathanponciano/2022/03/31/stocks-just-posted-worst-quarter-since-covid-market-crash-but-buffetts-new-favorite-sector-logged-meteoric-ascent/