U.S. energy stocks take the lead in the S&P 500 as inflation anxiety builds
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Investors are taking cover in oil and gas producers as inflation fears mount, putting the group back at the top of the S&P 500 leaderboard after trailing badly the past two years.
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The price of oil may be down about six per cent this year, but energy shares are now the top-performing of 11 sectors in the equity benchmark. The group has been up almost eight per cent in 2025 amid a broad market slide of nearly four per cent.
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Lingering inflation anxiety, a supportive administration — United States President Donald Trump met with oil executives on Wednesday — as well as intensifying geopolitical tensions have fuelled the strength in the shares. With long-term inflation expectations surging, the sector’s hedging appeal is key for investors looking to gird their portfolios against the risk of rising price pressures.
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To Simon Lack, a portfolio manager for the Catalyst Energy Infrastructure Fund, it’s just the beginning for the shares.
“Energy’s going to outperform,” he said, adding that the sector remains underappreciated even after its recent climb. The White House “really likes U.S. energy and wants us to export more.”
The last time the sector led the S&P 500 for a full year was in 2022, when Russia’s invasion of Ukraine sent oil costs skyrocketing above US$100 a barrel. That price was about US$67 on Wednesday. In 2024, the sector got trounced, gaining about two per cent as the overall market soared more than 20 per cent, powered by tech shares.
A University of Michigan survey last week signalled how Trump’s tariff threats are rippling through the economy. It showed that consumers expect prices to rise at an annual rate of 3.9 per cent over the next five to 10 years, the highest in more than three decades. New economic projections from the Fed on Wednesday showed officials boosted their inflation estimates. Chair Jerome Powell, for his part, said the long-term University of Michigan reading was an “outlier.”
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Investors, however, are pouring money into the stocks.
Bank of America Corp. clients piled into energy more than any other sector as the S&P 500 went into a correction last week. Institutions were big buyers as the cohort notched its biggest inflow since the Silicon Valley Bank crisis, the bank’s analysis showed.
To be sure, there are a raft of potential challenges to the sector’s rally, including from Trump.
Energy faces a “barrage of uncertainties,” according to Eric Nuttall, a portfolio manager at Ninepoint Partners LP, including the administration’s mantra of seeking lower oil prices and the potential of more Russian oil supplies hitting the market should there be a ceasefire in Ukraine.
Wall Street is growing more positive on the group. The sector saw negative earnings revisions last year but is now garnering upgrades at a time when other S&P 500 segments are being hit with downgrades, according to Barclays PLC.
Energy also remains one of the cheapest areas in the market and faltering performance from high-growth tech stocks has investors looking for value.
“Energy has been unloved for a long time,” said Lack at the Catalyst Energy Infrastructure Fund.
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The sector is also poised to see double-digit profit growth in the third quarter and market-leading earnings growth of 20 per cent in the following three months, according to data compiled by Bloomberg Intelligence.
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