Can Energy Stocks Close the 10-Year Performance Gap with the S&P 500?

The Energy sector has been topsy-turvy over the past few years. In 2022, when the S&P 500 experienced a bear market and 9 of 11 sectors posted negative performance, the Energy sector delivered a banner year (+65.7%). The next best performer that year was Utilities, which rose a meager +1.6%. Energy was also the best-performing sector in 2021, rising +54.6%.

But it hasn’t been a period of straight-line gains for the Energy sector. In 2023, Energy flipped back to being the second worst-performing sector in the S&P 500, falling -1.3%. Utilities was the worst performer that year, posting a -7.1% decline.

If investors look at the last three years, the Energy sector has delivered annualized returns of +17.64%, compared to the S&P 500’s +8.56% annualized return over the same period. While that may seem very strong, zooming out further to 5-year or 10-year annualized returns shows Energy lagging the S&P 500 index by a significant margin. Over the past 10 years, for instance, Energy’s annualized return is flat, while the S&P 500 has delivered slightly over 10% annualized.¹

This historical look at Energy sector returns is meant to frame the question: Can Energy stocks close the 10-year performance gap with the S&P 500?

---

A Better Way Forward for Passive Investors

Passive investing using ETFs has become popular, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500. Unfortunately, these funds make it difficult to beat the market—because an index fund essentially is the market.

Zacks Advantage offers a better way forward: We have always been committed to a research-driven investment process, and we have refined our active investment experience to optimize the passive investment realm. Our actively managed robo advisor offers:

• Targeted asset allocation
• Automatic diversification
• Built-in discipline
• Simplified investing – with low fees!

Learn more with our free guide, A Better Way Forward: Actively Managing Passive Index Funds. ²

---

Let’s start with the counterargument—i.e., why Energy stocks could continue to lag.

By some estimates, supply and demand dynamics looking forward are working against the Energy sector’s current makeup, which is dominated by oil and gas companies. According to the International Energy Agency (IEA), oil demand is set to peak in 2029 at around 100 million barrels a day, giving way to declines as renewable energy sources proliferate and as global consumers continue shifting to electric vehicles (EVs).

On the supply side, the IEA predicts that oil production will surge past demand, increasing to 113.8 million barrels a day driven largely by the United States and South American countries. The end result, according to the IEA, is “levels of spare capacity never seen before other than at the height of the Covid-19 lockdowns in 2020.” ³

When supply outstrips demand by this wide of a margin, price pressures can crush margins and earnings for major companies in the Energy sector. This is what’s driving a bleak long-term performance outlook relative to the broad S&P 500.

We see a couple of issues with this stance on the Energy sector, however.

The first is that we think it’s ineffectual to try and forecast supply and demand more than a year or two into the future. Projecting what oil demand will be in 2029 means baking in too many assumptions about economic growth, trends in the energy transition, consumer behavior, geopolitics, and so on. There is simply no way to know how the energy mix will look five years from now. The IEA acknowledged as much in their report, stating that economic growth trends and EV adoption were risks to their forecast.

The second is that global economic growth has been resilient, and in the case of the United States, has been stronger-than-expected in the past couple of years. China and Europe have struggled to deliver strong growth during this period, but economic indicators in 2024 are showing improvement. Better-than-expected economic growth tends to drive higher-than-expected energy demand, which can provide support to oil prices and profit margins in the process.

A constructive view of the Energy sector would also point to current valuations as a reason to be optimistic. Of the 11 S&P 500 sectors, Energy is the cheapest in terms of forward P/E. The sector trades at 11x forward earnings, which is lower than every other sector and also is well below Energy’s longer-term forward P/E of roughly 17x.

Finally, there’s a geopolitical component. Looking at the current conflicts in the Middle East and Ukraine, it seems fair to say that these conflicts are unfortunately showing few signs of abating. Oil production is global, so regional conflicts do not tend to have a substantial impact on global supply. But we have seen price volatility in the wake of crises, and ownership of the Energy sector might be viewed by investors as a hedge against geopolitical risk.

Bottom Line for Investors

In our view, stronger-than-expected global economic growth—combined with attractive valuations—should bolster the outlook for the Energy sector looking forward. This does not necessarily mean taking a major overweight position to Energy in equity portfolios. But we do see a strong case for including Energy stocks as a key component of diversified portfolios, despite recent IEA forecasts suggesting that oil supply is poised to outstrip demand later in the decade.

In recent years, passive investing has become a popular approach, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500.

However, a purely passive approach cannot beat the market (because it basically is the market). That’s why Zacks Advantage offers an actively managed robo advisor that:

• Invests exclusively with ETFs
• Uses technology to recommend the appropriate mix of equities and bond ETFs to help achieve your investing goal and specific risk tolerance
• Lowers fees and expenses

Get our free guide, A Better Way Forward: Actively Managing Passive Index Funds, to learn the 4 issues that can hold back returns for passive investors, and how Zacks Advantage can help you overcome them.

Download our FREE Guide⁴

© 2024 Zacks Advantage  |  Privacy Policy  |  Unsubscribe

¹ Black Rock. June 6, 2024.

² Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

³ MSN. 2024.

⁴ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

DISCLOSURE

Past performance is no guarantee of future results. Inherent in any investment is the potential for loss.

Zacks Advantage is a service offered by Zacks Investment Management, a wholly-owned subsidiary of Zacks Investment Research.

Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Do not act or rely upon the information and advice given in this publication without seeking the services of competent and professional legal, tax, or accounting counsel. Publication and distribution of this article is not intended to create, and the information contained herein does not constitute, an attorney-client relationship. No recommendation or advice is being given as to whether any investment or strategy is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole.

Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

Certain economic and market information contained herein has been obtained from published sources prepared by other parties. Zacks Investment Management does not assume any responsibility for the accuracy or completeness of such information. Further, no third party has assumed responsibility for independently verifying the information contained herein and accordingly no such persons make any representations with respect to the accuracy, completeness or reasonableness of the information provided herein. Unless otherwise indicated, market analysis and conclusions are based upon opinions or assumptions that Zacks Investment Management considers to be reasonable. Any investment inherently involves a high degree of risk, beyond any specific risks discussed herein.

The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

Robo investments are subject to some unique risks, including, but not limited to, the fact that investment decisions are made by algorithms based on investors’ answers to questions, there is a lack of human involvement, and there is the possibility that the software may not always perform exactly as intended or disclosed. Such investment programs are only suitable for investors who can bear the risk of a complete loss of their investments.

The S&P GSCI is the first major investable commodity index. It is one of the most widely recognized benchmarks that is broad-based and production weighted to represent the global commodity market beta. The index is designed to be investable by including the most liquid commodity futures, and provides diversification with low correlations to other asset classes. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The NASDAQ-100 Index includes 100 of the largest domestic and international non-financial companies listed on The NASDAQ Stock Market based on market capitalization. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology. Index composition is reviewed on an annual basis in December. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Zacks Investment Management 10 S. Riverside Plaza, Suite 1600 Chicago IL 60606-3830