2023-06-12 05:05:40 ET
Summary
- The relationship between energy stocks and the technology sector has been a roller coaster ride in recent years.
- As the world's energy needs continue to increase, artificial intelligence can play a crucial role in addressing these demands.
- While the short-term outlook for energy stocks may appear uncertain, there are reasons to believe that a comeback is possible.
Energy and persistence conquer all things." - Benjamin Franklin
The relationship between energy stocks ( XLE ) and the technology sector ( XLK ) has been a roller coaster ride in recent years. With global economic shifts, the rise of artificial intelligence, and the increasing focus on sustainability, the question arises: can energy stocks make a comeback and outperform technology like it did last year, or was 2022 simply an oversold relative bounce against a longer term secular trend in underperformance?
The Role of Business Cycles in Energy Stocks Performance
Business cycles play a significant role in the performance of energy stocks. As economies go through phases of expansion and contraction, different types of stocks tend to outperform others. In general, value stocks, which include energy stocks, tend to perform better during periods of economic expansion. Growth stocks, on the other hand, typically outperform during periods of economic slowdown. Of course, the reality has been quite different, as the relationship seems to have flipped.
Economic Expansion and the Rise of Value Stocks
During periods of economic acceleration, value stocks, led by financial and industrial companies, tend to outperform. As the global economy expands, the demand for basic materials, such as metals, and energy-related commodities, such as oil and natural gas, rises. This increased demand leads to higher prices for these commodities and, in turn, boosts the performance of energy stocks.
Central banks typically respond to economic expansion by raising short-term interest rates, which can eventually lead to a flattening or inversion of the yield curve as we are seeing now. As a result, lending activity to businesses may slow, profits of financial institutions may decline, and financial stock prices may lag market averages. In this environment, growth stocks tend to outperform, as they can grow earnings regardless of the pace of economic growth. Add to that new narratives like artificial intelligence, and we can see that it somewhat makes sense to see energy stocks broadly underperform tech.
Economic Slowdown and the Shift to Growth Stocks
When economies begin to slow down, growth stocks usually take the lead. These companies can maintain earnings growth even in a sluggish economic environment, which makes them more attractive to investors. Growth stocks have resumed their leadership after underperforming value stocks in 2022, and in a major way.
The Current State of Energy Stocks
The market has favored many value-oriented or economically sensitive sectors, including energy stocks, to start the year. However, this changed quickly as the calendar rolled into February. The Federal Reserve showed no indication of slowing the pace of increase in short-term interest rates, and the debt ceiling debate in Washington rose to the top of the list of concerns, among other factors.
In this environment, growth stocks have outperformed, while defensive sectors like consumer staples ( XLP ), utilities ( XLU ), and health care ( XLV ) have lagged. Financial sector returns have also suffered due to balance sheet issues with banks. Despite these challenges, it's essential to consider the potential for a comeback in energy stocks.
Stock-Specific Ideas Worth Paying Attention To
While considering the broader trends affecting energy stocks, investors should also pay attention to specific companies that demonstrate strong potential for growth and resilience in the face of challenges. Some stock-specific ideas worth considering include:
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XLE ETF : The Energy Select Sector SPDR Fund ( XLE ) is an ETF that provides exposure to the energy sector by tracking the performance of the Energy Select Sector Index. This fund allows investors to gain diversified exposure to various energy companies while mitigating the risks associated with individual stock investments.
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Innovative Green Energy Companies : As the world shifts towards more sustainable energy sources, companies that are at the forefront of green energy innovation stand to benefit. Examples include companies involved in solar power, wind energy, and electric vehicle technology.
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Artificial Intelligence Integration : Companies that successfully integrate AI into their operations to improve efficiency, reduce costs, and enhance decision-making could potentially outperform their competitors in the energy sector.
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Companies with Strong Fundamentals : Energy stocks don't necessarily need rising oil prices to generate profits. Instead, well-managed companies with strong fundamentals can continue to make money even in a challenging market environment.
Conclusion
While the short-term outlook for energy stocks may appear uncertain, there are reasons to believe that a comeback is possible. As global energy needs continue to grow, and the world increasingly embraces artificial intelligence and sustainable energy sources, energy companies that adapt and innovate have the potential to outperform technology stocks.
By paying attention to stock-specific ideas and considering the broader trends affecting the energy sector, investors can make informed decisions about whether to include energy stocks in their portfolios. Ultimately, the potential for a comeback in energy stocks will depend on a combination of market forces, technological advancements, and the ability of individual companies to adapt to a changing landscape.
For further details see:
XLE ETF: Can Energy Reclaim The 2022 Throne?