Energy stocks have been outperforming the broader markets this year, as investors increasingly favor companies with robust free cash flow that are well-positioned to pay dividends and endure economic downturns. Although oil prices have dipped by 2% since the beginning of the year, the S&P 500 Energy Select ETF (XLE) has climbed nearly 8%. In contrast, the Tech (XLK) and Consumer Discretionary (XLY) sectors have seen declines of over 8% and 12%, respectively.
“The energy sector continues to offer compelling investment characteristics, including high free cash flow yields and investor-friendly capital allocation through cash dividends, dividend growth, and stock buybacks,” explained Rob Thummel, senior portfolio manager at Tortoise Capital. Energy-related equities are somewhat shielded from recent uncertainties surrounding tariffs and inflation, which have adversely affected growth stocks. “I think tariffs will have less impact on the energy sector than on others,” commented Simon Lack, portfolio manager for the Catalyst Energy Infrastructure Fund (MLXAX), adding that it’s unlikely other countries will impose tariffs on U.S. energy exports.
Under President Trump’s administration, a favorable regulatory environment is anticipated to lower production costs for energy companies. “Additionally, he has signaled a willingness to reconsider tariffs if other countries buy more U.S. oil and gas, reinforcing a positive outlook for the sector,” Lack added.
In the energy complex, natural gas has been a standout performer, contributing to the rise of equities within the sector. “These companies are benefiting from a more than 30% increase in natural gas prices expected in 2025,” noted Thummel. For instance, Plains All American Pipeline (PAA) has increased by 17% year to date, while MPLX, a natural-gas pipeline transportation company, has risen about 12% since the start of the year.
On Friday, oil was set for its second consecutive week of gains after hitting its lowest level of the year earlier this month, with Brent crude, the international benchmark, hovering above $71 per barrel. “Our model indicates Brent prices in the low $70s are about $6 undervalued,” wrote JPMorgan’s Natasha Kaneva in a note on Thursday. “We expect Brent prices to rise to the mid- to high-$70s in the coming months, then fall below $70, ending the year in the mid-$60s, averaging $73.”
Consumer Insights
- With energy stocks on the rise, investors might find attractive opportunities in this sector, especially those seeking dividends and stable growth.
- The current regulatory environment could lead to lower production costs for energy companies, potentially translating to cost savings for consumers.
- Natural gas price increases may impact utility bills, influencing household budgets and energy consumption choices.
- With tariffs having less impact on the energy sector, consumers might experience more stability in energy-related markets compared to other sectors facing trade uncertainties.
- Ongoing changes in oil prices could affect gasoline prices, impacting transportation costs for individuals and businesses alike.
