(Bloomberg) -- Energy stocks have failed to capture the imagination of retail traders as individual investors sit out the rally — despite exhortations by top Wall Street strategists to jump in.
That might be because energy equities have struggled to keep pace with skyrocketing oil. The S&P 500 Energy Index has jumped about 14% since late June, but oil prices have outstripped the sector over the same period soaring roughly 30% to top $93 a barrel — a 15-month high — driven by OPEC+ supply cuts and the promise of increasing demand as the outlook for the world’s biggest economies improves.
As long as the momentum in crude continues Wall Street expects the stocks to close that performance gap, but so far they have not been able to convince retail investors to buy into the sector. On Monday, JPMorgan Chase & Co.’s chief markets strategist recommended investors stay overweight energy and commodities. “We see room for a further rise in commodity prices, and investor allocations remain low,” Marko Kolanovic wrote.
Similarly, Morgan Stanley chief investment officer Michael Wilson said he had a preference for energy this late in the business cycle. “Oil demand is strong, production cuts have been significant and our commodity strategists see crude prices underpinned around current levels,” he told investors. But positioning is historically light.
Even calls for oil at $100 a barrel has not been able to draw generalists into oil and gas stocks. “Rather than chasing the rally in energy stocks, retail investors are currently exhibiting caution,” Vanda Research analysts led by senior vice-president Marco Iachini wrote in a Sept. 14 note.
The set up is a sharp contrast to 2022, when energy stocks were outperforming oil and the broader market. The stock market’s new darlings may be at least partly to blame as the artificial intelligence-themed investing craze has sent stocks like Nvidia Corp. sharply higher this year.
“Last year, the energy sector was the only game in town,” VettaFi’s head of energy research Stacey Morris said, adding that the hype for AI and technology stocks has made it difficult for energy to get a lot of attention since “$90 oil draws a lot more attention when nothing else is working.”
Some of the divergence can also be traced to struggles at specific large-capitalization oil stocks, like Chevron Corp., which accounts for 17% of the S&P 500 Energy Index. The stock has fallen over 7% year to date, weighted down by concerns over a strike at a major LNG project in Australia and disappointing production growth.
Typically, oil and gas stocks follow the underlying price of crude closely. But the correlation between the S&P 500 Energy index and WTI has fallen from over 70% in June to roughly 28% for much of September, suggesting investors doubt the longevity of the oil rally amid concerns about the economy.
While energy has been the best performing sector in the S&P 500 benchmark in the third quarter, Wall Street remains fairly skeptical of oil and gas stocks will continue to outstrip the broader market. Price targets for the sector suggest a 9% average return potential for the energy index, compared with 16% for the S&P 500.
Investors might need to wait for the next earnings report to suss out if Wall Street is missing the mark. At least one investor, Louis Navellier, sees the energy patch driving earnings higher.
“The energy stocks will obviously beat because of higher energy costs right now,” the chief investment officer at Navellier & Associates told clients. “The world cannot have a disruption in energy right now because the supply-demand imbalance in the world is very fragile.”
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