Why Does Wall Street Favor Energy Stocks So Much? Valuation Hits Bottom and Policy Benefits

Despite the recent poor performance of energy stocks and pressure on oil prices, Wall Street analysts are showing rare bullish sentiment, driven by the sector's bottomed valuations, potential policy benefits, and its historical role as an inflation hedge.

Data shows that among the 11 sectors of the S&P 500 index, the energy sector has the highest proportion of stocks rated "buy." About three-quarters of energy companies received buy recommendations, far exceeding the roughly half-level of the broader market. Meanwhile, sell-side analysts expect energy stocks to rise about 16% over the next 12 months, a forecasted increase second only to the healthcare sector and nearly double the overall expected increase for the S&P 500 index.

This optimistic sentiment stands in stark contrast to the harsh realities of the market. So far this year, energy stocks are one of only three sectors in the S&P 500 that have recorded declines, and they have underperformed the broader market in four of the past five quarters. Influenced by the aftermath of the Trump administration's trade war and OPEC+'s restoration of supply, U.S. crude oil prices have fallen about 7% this year.

However, investor interest in energy stocks is not unfounded. Analysts believe that Trump's public support for the industry, along with a spending bill favorable to oil and gas producers, could be key catalysts for driving the sector upward, although the market is still waiting for more specific actions from the White House.

Valuation Lows Reveal Investment Value

One of the most attractive aspects of energy stocks for analysts is their extremely low valuations. In terms of price-to-earnings ratios, the energy sector is currently the cheapest sector in the S&P 500 index, providing investors with potential safety margins and upside potential.

Leo Mariani, an analyst at Roth Capital Partners, stated in an interview:

"The investment logic held by some is that the current valuations and P/E levels of this sector are indeed very, very low."

Additionally, from a longer-term perspective, the sector's earnings prospects are also highly regarded. According to industry research data, the energy sector is expected to achieve the highest earnings growth among all sectors by 2026.

Political factors are another major pillar supporting Wall Street's bullish outlook on energy stocks. President Trump is a staunch supporter of the industry, having publicly called for companies to "drill, baby, drill."

More importantly, a spending bill signed by Trump has already brought tangible benefits to oil and gas producers by eliminating subsidies for renewable energy. According to Xinhua News Agency, Trump announced a series of executive orders on January 20. Among them, the energy sector includes declaring a national energy emergency, increasing traditional energy extraction, ending the Biden administration's "Green New Deal," and revoking electric vehicle incentives to save the American traditional auto industry Although this initiative has not immediately triggered a rebound in energy stocks, analysts believe its long-term impact cannot be ignored. Stock strategist Michael Casper stated that Wall Street analysts may be waiting for more actions from the White House:

"Trump is being touted as someone who will help American energy producers."

Real Challenges and Short-Term Resistance

However, the short-term resistance faced by the sector remains significant. BMO Capital Markets expects that due to weakening crude oil prices, U.S. energy producers' earnings in the second quarter will decline by 30% compared to the first quarter, with cash flow dropping by 15% during the same period. Analyst Phillip Jungwirth pointed out the direct impact of weak oil prices on corporate finances.

Institutional investor sentiment is also generally low. Roth Capital's Mariani acknowledged that the sentiment in the sector remains weak:

"Is there a catalyst in the next 12 months that can dramatically change and reverse this situation? I'm not sure there's anything particularly clear."

Finally, a traditional advantage of energy stocks is their ability to hedge against inflation. In an environment of rising prices, energy stocks often perform well.

Historical data shows that when U.S. consumer prices soared, energy stocks were the best-performing sector in 2022. With the risk of the Trump administration's tariff policies pushing future prices higher, the role of energy stocks as an inflation hedge may again attract investors' attention.

Risk Warning and Disclaimer

The market carries risks, and investment should be approached with caution. This article does not constitute personal investment advice and does not take into account individual users' specific investment goals, financial situations, or needs. Users should consider whether any opinions, views, or conclusions in this article align with their specific circumstances. Investment based on this is at one's own risk