Wall Street Week Ahead Recession fears pose challenge to energy shares after stellar year

New York, Jan. 28 (BNA): A possible US recession and tough comparisons to 2022 weigh on prospects for energy stocks that will return to last year’s impressive trajectory, despite valuations that are still seen as relatively cheap.

The S&P 500 is up 4.2% year-to-date, lagging slightly behind the broader index’s rally. The sector posted a 59% jump in 2022, an otherwise brutal year for stocks that saw the S&P 500 plunge 19.4%, Reuters reports.

Energy hardliners argue that the sector’s valuations make the case for a third straight year of gains, which would be the group’s first such achievement since 2013. Goldman Sachs, RBC Capital Markets and UBS Global Wealth Management are among the Wall Street firms recommending energy stores.

Despite last year’s trading, the sector trades at 10 times forward price-to-earnings, compared to 17 times for the broad market, and many of its stocks offer strong dividend yields.

The potential returns for shareholders were highlighted this week when Chevron shares rose nearly 5% after announcing plans to buy $75 billion worth of its shares.

However, some investors worry that energy companies may find it difficult to increase their profits after huge jumps in 2022, especially if the widely expected US economic slowdown hits commodity prices.

“The group appears to be holding up quite well, but there is some apprehension due to the fact that investors are worried about the economic slowdown and what that will do on demand,” said Robert Pavlik, senior portfolio manager at Dakota Wealth.

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He said he was experiencing an uptick in the energy sector, including shares of Chevron and Pioneer Natural Resources.

Economic analysts in a Reuters survey expected the US crude price to average $84.84 per barrel in 2023, compared to an average price of $94.33 last year, citing expectations of a weakening global economy. US crude oil prices recently stood at around $80 a barrel.

At the same time, many investors have consolidated their holdings of energy stocks in 2022 after years of avoiding the sector, which has often underperformed the broader market amid concerns such as poor capital allocation by companies and uncertainty about the future of fossil fuels.

The sector’s weight in the S&P 500 nearly doubled last year, to 5.2%.

However, that dynamic may fade, said Aaron Dunn, co-head of the equity value team at Eaton Vance.

“People have come back to energy in a big way,” he said. “We’ve had that tailwind the last couple of years, which is that everyone just didn’t invest enough in energy. I don’t think that’s the case anymore.”

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