Prediction: This will be the best performing sector in 2024

Themes and market leaders define every bull market. Megacap technology-focused growth stocks are the clear leaders of the broader market rally. And artificial intelligence continues to be a dominant topic in the market.

With less than 4% S&P 500, the energy sector often flies under the radar. This is especially true when growth themes gain attention. But the energy sector has a rare mix of growth, value and income that could support further upside.

Here’s why we think the energy sector will outperform the other 10 sectors of the S&P 500 in 2024.

Image source: Getty Images.

pole position

Choosing the energy sector in early April is somewhat unfair. Energy, with a 12.6% return, is the best-performing sector year to date (YTD) and one of only two sectors to outperform the S&P 500 over the past three years.

^SPX data from YCharts.

Most of the sector’s YTD gains occurred in March, driven by higher oil prices.

ongoing geopolitical tensions

Following the severe economic downturn caused by COVID-19 in early 2020, the oil and gas industry began to recover later that year as energy demand recovered globally. However, the onset of sanctions and supply restrictions following Russia’s invasion of Ukraine in February 2022 has kept global oil and gas demand high, ensuring continued performance for the energy sector over the past 24 months.

Because geopolitical tensions persist, looking at global supply and demand is not always practical. Rather, what matters is where the supply comes from and who will buy it.

For some countries, securing reliable supplies from the United States and its allies may be viewed as more valuable than obtaining supplies from elsewhere, which helps support increased U.S. oil and gas exports.

Economic growth

Economic growth is generally matched by increased demand along with increased energy consumption. The prospect of lower interest rates could accelerate economic growth and benefit the oil and gas industry as well as the renewable energy industry.

Renewables have been hit hard by high interest rates. This is because the cost of capital has risen and the return on investment for many projects has fallen. In comparison, oil and gas companies with positive free cash flow do not need to take on more debt. In fact, many people are investing in low-carbon efforts.

The energy transition is a major long-term tailwind for renewable energy, but the world still relies on oil and gas to support economic growth.

income and value

that much Energy Choice Sector SDPR Fund (XLE 1.07%) — One of the best ETFs in the industry — has a price-to-earnings ratio (P/E) of just 8.7 and a yield of 3.5%. Earnings would have to fall by more than two-thirds for the sector to trade at the same value as the S&P 500. Meanwhile, the S&P 500 returns only 1.3%.

The Energy sector has the Value and Income boxes checked. There is also growth ahead, with many companies seeing their profits reach record highs in 2022. We don’t expect 2024 revenues to reach that level, 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%) Until 2027, the corporate plan uses a Brent (international benchmark) crude oil price of $60 per barrel. meantime, ConocoPhillips — The largest U.S.-based independent E&P company has set a 10-year plan to set the price of West Texas Intermediate (the U.S. benchmark) crude oil at $60 per barrel.

Currently, the price of Brent is $87 and the price of WTI is $83, which provides a significant margin of error. In 2023, Brent crude oil averaged $82.49 per barrel and WTI averaged $77.64. Last year, many producers were able to increase production, capital expenditures, dividends and buybacks.

Fundamental Investments in the Energy Sector

E&P companies often benefit the 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. chevron. Exxon has paid and raised its dividend for 41 consecutive years, with Chevron close behind for 37 consecutive years. Both companies operate globally and do not rely solely on U.S. production. They also have a large oil refining business and the cash to diversify into low-carbon solutions.

Another option is the previously mentioned Energy Select Sector SDPR Fund or 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%. The Global Energy ETF doesn’t only invest in U.S. companies and has a higher expense ratio of 0.44%.

husks, total energy, BP, canada natural resourcesand Enbridge None of the Global Energy ETF’s top 10 holdings are based in the U.S., so they are not included in the Energy Select Sector SPDR fund.

With a 7.8 P/E ratio and 3.4% dividend yield, the Global Energy ETF has a valuation and dividend yield almost identical to the Energy Select Fund.

For many investors, a 50-50 split between the two ETFs, or a 50-50 split between Exxon and Chevron, may be the simplest starting point rather than an all-or-nothing approach.