March has been a solid month for the S&P 500 (^GSPC) — and an even better one for oil- and gas-related stocks.
As the month draws to a close, energy has emerged as the top-performing sector. The S&P 500 Energy Select ETF (XLE), which includes oil giants like ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP), has gained more than 12% compared to the benchmark index’s rise of about 3% in the same period.
Energy’s outsized rise comes as oil futures have climbed more than 15% since the start of 2024. West Texas Intermediate (CL=F) and Brent (BZ=F), the international benchmark price, were trading near $83 and $87 per barrel, respectively, on Thursday.
Falling inventories earlier this month, drone attacks against Russian refineries, and continued output cuts from oil alliance OPEC+ have helped move the price of crude futures higher in March.
This week Morgan Stanley analysts upgraded the Energy sector to Overweight from Neutral, noting that earnings could be revised higher. They also cited “strong breadth and compelling valuation.”
“The recent stability of crude prices also points to a catch up in both relative performance and earnings growth, in our view,” wrote Morgan Stanley’s Michael Wilson.
The analyst highlights the firm’s forecast of $90 per barrel for Brent by the third quarter due to tighter supply-demand balances.
Wilson wrote, “The divergence between oil prices and the sector’s relative performance is likely to close via a catch up in Energy equities.”
Among some of the biggest movers: Diamondback Energy (FANG) is up 27%, and Pioneer Natural Resources (PXD) and ExxonMobil are each up roughly 16% year to date.
The rotation into energy-related stocks marks a reversal from 2023’s market action, when XLE ended the year down more than 3% as oil fell 10% from the prior year.
The gains this year hint at a broadening of the market rally beyond the Magnificent Seven trade, which itself has shown signs of waning as Tesla (TSLA) and Apple (AAPL) have lost value this year.
“We think the Mag Seven is going to become the Lag Seven,” Piper Sandler chief market technician Craig Johnson told Yahoo Finance Live earlier this month.
“At this point in time, we’re going to start to see a broadening out of this market,” he added.
Last month Bank of America’s head of US equity and quantitative strategy Savita Subramanian called for a broadening of the rally by June.
Subramanian’s research showed the other 493 companies in the S&P 500 are expected to grow earnings by more than the Magnificent Seven in the fourth quarter of this year.
