US Energy Sector Poised to Outshine in 2024: Reasons for Bullish Expectations

Each bull market in the US stock market is defined by its own investment themes and leading stocks. In this current bull market, it’s indisputable that mega-cap technology growth stocks are leading the pack, and artificial intelligence (AI) continues to dominate the market as a theme. However, when it comes to predicting the sector with the highest potential gains in 2024, the energy sector, which accounts for less than 4% of the S&P 500 index weight, stands out for its rare combination of growth, value, and income.

Here are the reasons why the US energy sector is expected to outperform the other 10 sectors of the S&P 500 index in 2024:

Technology steals the spotlight while energy leads the pack Thanks to the rise in oil prices, the energy sector has surged strongly in the past three months, posting a return of 12.6%, making it the best-performing sector in the US stock market so far this year. Over the past three years, only two sectors have outperformed the S&P 500 index (32.7%): technology (59.4%) and energy (91.8%).

Ongoing geopolitical tensions After the COVID-19 pandemic, global energy demand and the oil and gas industry are in the process of recovery. By February 2022, the outbreak of the Russia-Ukraine war and the subsequent sanctions and supply issues have continued to bolster the strong performance of the energy sector. Against the backdrop of ongoing geopolitical tensions, reliable oil supply from the US and its allied countries has become more valuable for some nations, leading to the growth of US petroleum and natural gas exports.

Economic growth Economic growth is often accompanied by an increase in energy consumption, driving demand. Prospects for interest rate cuts or accelerated economic growth are favorable for the oil and gas industry as well as the renewable energy industry. High interest rates have taken a toll on the renewable energy industry, whereas cash-rich oil and gas companies not only have no need for borrowing but many of them are also investing in low-carbon projects. While the long-term prospects for renewable energy are positive due to the energy transition, the real world still relies on oil and gas to support economic growth.

Income and value The price-to-earnings ratio of the Energy Select Sector SPDR Fund (XLE) is only 8.7, with a dividend yield of 3.5%, compared to the S&P 500 index’s dividend yield of only 1.3%. In addition to value and income, the energy sector also has growth potential, with many companies achieving record profits in 2022. While 2024 profits may not reach the levels of 2022, they are still expected to be strong. Last year, many producers increased production, capital expenditures, dividends, and share buyback programs.

In summary, the energy sector presents a compelling case for outperforming other sectors in the S&P 500 index in 2024, driven by factors such as rising oil prices, geopolitical tensions, economic growth, and its combination of growth, value, and income.