Investors are turning to U.S. energy shares in droves, capitalizing on surging oil prices and a resilient economy while seeking protection against looming inflationary pressures.

The S&P 500 energy sector has witnessed a remarkable ascent in 2024, boasting gains of approximately 17%, effectively doubling the broader index’s year-to-date performance.

This surge has intensified in recent weeks, propelling the energy sector to the forefront of the S&P 500’s top-performing sectors.

A significant catalyst driving this rally is the relentless rise in oil prices. U.S. crude has surged by 20% year-to-date, propelled by robust economic indicators in the United States and escalating tensions in the Middle East.

Investors are also turning to energy shares as a hedge against inflation, which has proven more persistent than anticipated, threatening to derail the broader market rally.

Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group, notes that having exposure to commodities can serve as a hedge against inflationary pressures, prompting many portfolios to overweight energy stocks.

Shell Service Station

Energy companies

This sentiment is underscored by the disciplined capital spending observed among energy companies, particularly oil majors such as Exxon Mobil and Chevron.

Among the standout performers within the energy sector this year are Marathon Petroleum, which has surged by 40%, and Valero Energy, up by an impressive 33%.

As the first-quarter earnings season kicks into high gear, with reports from major companies such as Netflix, Bank of America, and Procter & Gamble, investors will closely scrutinize economic indicators such as monthly U.S. retail sales to gauge consumer behavior amidst lingering inflation concerns.

The rally in energy stocks signals a broadening of the U.S. equities rally beyond growth and technology companies that dominated last year.

However, escalating inflation expectations and concerns about a hawkish Federal Reserve could dampen investors’ appetite for non-commodities-related sectors.

Peter Tuz, president of Chase Investment Counsel Corp., highlights investors’ focus on the robust economy amidst supply bottlenecks in commodities, especially oil.

This sentiment is echoed by strategists at Morgan Stanley and RBC Capital Markets, who maintain bullish calls on energy shares, citing heightened geopolitical risks and strong economic fundamentals.