Prediction: The Top Performing Industry in 2024

The energy sector is characterized by growth, value and income.

Themes and market leaders determine every bull market. There’s no question that tech-heavy mega-growth stocks are prime candidates for a broader market rally. And artificial intelligence continues to be a major theme in the market.

At just under 4% of the S&P 500, the energy sector often flies under the radar. This is especially true when the focus is on growth topics. However, there is a rare combination in the energy sector that could lead to further upside in growth, value, and profits.

This is why we think the energy sector will outperform the other 10 sectors in the S&P 500 in 2024.

Pole Position

It’s a bit unfair to pick the energy sector at the beginning of April. Energy was the best-performing sector year-to-date (YTD) with a return of 12.6%, making it one of only two sectors to outperform the S&P 500 over the past three years.

Nearly all of the sector’s year-to-date gains occurred in his March, primarily in response to higher oil prices.

Ongoing geopolitical tensions

After the severe economic downturn caused by COVID-19 in early 2020, the oil and gas industry began to recover towards the end of the year as global energy demand recovered. Ta. However, as sanctions and supply restrictions took hold following Russia’s invasion of Ukraine in February 2022, global oil and gas demand remained high, continuing the energy sector’s outperformance over the past 24 months.

As geopolitical tensions continue, it is not always practical to focus on global supply and demand. It’s more about where the supply comes from and who buys it.

Securing reliable supplies from the United States and its allies may be more valuable to some countries than supplies from other countries, leading to increased U.S. oil and gas exports.

Economic Growth

Economic growth is usually accompanied by an increase in energy consumption and thus an increase in demand. The prospect of lower interest rates could accelerate economic growth and support the oil and gas and renewable energy industries.

Renewable energy has been hit hard by high interest rates, as the cost of capital has increased and the return on investment for many projects has declined. By comparison, oil and gas companies with positive free cash flow don’t need to take on additional debt. In fact, many people are investing in carbon reduction efforts.

Although the energy transition is a major tailwind for renewable energy in the long term, the world remains dependent on oil and gas to support economic growth.

Earnings and Value

One of the top ETFs in this space, the Energy Select Sector SDPR Fund (XLE 1.07%) has a price-to-earnings (P/E) ratio of just 8.7x and a yield of 3.5%. . To reach the same valuation as the S&P 500, the sector’s profits would need to fall by more than two-thirds. Meanwhile, the S&P 500 returned just 1.3%.

In the Energy sector, the “Value” and “Income” checkboxes are checked. Growth is also visible, with many companies’ profits reaching record highs in 2022. We don’t expect revenues to reach that level in 2024, but if this year is anything like 2023, the energy sector will do very well.

Many integrated majors and exploration and production (E&P) companies are targeting oil prices well below current levels. ExxonMobil’s (XOM 1.38%) corporate plan through 2027 assumes a Brent crude oil price (international benchmark) of $60 per barrel. Meanwhile, ConocoPhillips, the largest independent U.S.-based oil developer, has a 10-year plan based on West Texas Intermediate crude oil prices (the U.S. benchmark) of $60 per barrel.

Current Brent price is $87 and WTI price is $83. This is a considerable margin of error. Brent crude averaged $82.49 per barrel in 2023, while WTI crude averaged $77.64. Last year, many producers were able to increase production, investment, dividends and buybacks.

Investing in essential energy sectors

Oil and gas development companies are often the ones who benefit most from rising oil and gas prices, but they are also the most vulnerable to economic downturns. A balanced approach is to start with an integrated major like ExxonMobil or Chevron. Exxon has increased its dividend in his 41st consecutive year, and Chevron is close behind with his 37-year winning streak. Both companies are global companies and do not rely solely on U.S. production. It also has capital for large-scale refining operations and diversification into low-carbon solutions.

Another option is an exchange-traded fund (ETF), such as the Energy Select Sector SDPR Fund mentioned above or the iShares Global Energy ETF (IXC 0.93%).

The Energy Select Sector SPDR fund invests in U.S. companies and has an expense ratio of 0.9%. Although the Global Energy ETF doesn’t invest exclusively in U.S. companies, it does have a high expense ratio of 0.44%.

Shell, Total Energy, BP, Canadian Natural Resources, and Enbridge are all in the top 10 stocks in the Global Energy ETF, but because they are not based in the US, they are included in the Energy Select Sector SPDR Fund. is not included.

With a P/E ratio of 7.8x and a dividend yield of 3.4%, the Global Energy ETF has about the same valuation and dividend yield as the Energy Select Fund.

For many investors, a 50/50 split of both ETFs, or his 50/50 split of Exxon and Chevron, may be the easiest starting point, rather than an all-or-nothing approach.