Energy shares see challenges as fears of the recession continue to trouble Wall Street
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The global economy is still in a fairly bad state, and many financial leaders fear that things are about to get significantly worse. In the US, the biggest fear right now seems to be the potential recession, which has caused Wall Street to be very careful about the moves it makes. This, in combination with tough comparisons to a stellar 2022, has particularly impacted the performance and the prospects of energy stocks.
Energy stocks had a surprisingly stunning run in 2022, but given the current situation, their future is starting to become questionable. The valuations seen right now remain comparatively cheap.
The S&P 500 energy sector has seen a 4.2% increase YTD, which is starting to hold back the rise of the broader index. While 2022 was a rather brutal year for stocks, causing the S&P 500 to drop by 19.4%, the energy sector logged a 59% jump. This has led energy bulls to argue whether the sector can continue seeing gains for its third year in a row.
Some claim that the sector’s valuation is an indication that this will, indeed be the case, and if they end up being correct, this would be the first time that something like this was achieved by the group since 2013. Some of the largest proponents of energy stocks on Wall Street include RBC Capital Markets, UBS Global Wealth Management, and Goldman Sachs.
The energy sector remains popular, but for how long?
The current data indicates that the energy sector currently trades at a 10 times forward price-to-earning ratio compared to 17 times for the broad market, despite its performance in 2022. In addition, most of its stocks now offer rather robust dividend yields, which is yet another reason why many prefer to buy them. As things are now, potential returns became the highlight of this week, following Chevron shares’ 5% surge. The increase came after the company announced that it intends to buy $75 billion worth of its own shares.
However, there is also the other side — investors who are skeptical of energy shares and who believe that energy firms are likely to encounter difficulties when it comes to increasing profits. They blame massive jumps in 2022 and claim that boosting the price further will be especially difficult if the US economic downturn — which is widely expected at this point — hits the prices of commodities.
Dakota Wealth’s Senior Portfolio Manager, Robert Pavlik, said that the group is still holding up well, but underneath the surface, investors worry about the upcoming economic slowdown and its impact on demand. He noted that Economists and analysts also expect the US crude to drop to $84.84 per barrel this year, compared to $94.33, which was the average price in 2022. Recently, however, US crude price ended up at $80 per barrel.
Generally speaking, investors are still highly interested in the energy sector, and many have joined it after previously avoiding it for years. However, experts suspect that this cannot last, and that things are likely to turn around at some point this year.