(Bloomberg) -- Energy shares are set to trounce the broader US market for the second straight year and most Wall Street analysts see that run extending into 2023, for one key reason: They’re still the cheapest stocks around.

This year hasn’t been a close contest. Energy has soared about 55% in 2022, which would be a record annual gain, while the runner-up among the 11 major S&P 500 Index segments is barely positive. The gap drives home how much of an oasis the industry has provided in an otherwise abysmal year for shareholders. 

With questions swirling around the outlook for 2023 as the Federal Reserve’s policy tightening spurs angst over a possible recession, energy bulls say the industry still looks attractive. They point to valuation — no S&P 500 sector has a lower price-to-earnings ratio — and to projections that oil prices will stabilize, in part amid the war in Ukraine.

“Energy screens more cheaply than any other sector category,” Ben Cook, a portfolio manager at Hennessy Funds who expects oil and gas stocks to lead again in 2023. “At the same time, it has the highest free cash-flow yield of any sector. It does look like energy can three-peat,” he said in an interview.

The stocks are coming off another blockbuster quarter of earnings, after crude surged following Russia’s invasion of Ukraine. The commodity’s price has since tumbled, but some analysts see it finding a floor with the war dragging on, Chinese demanding rebounding and potential OPEC production cuts.

The median forecast among those compiled by Bloomberg is for West Texas Intermediate to trade around $93 per barrel in 2023, from about $75 now. Bloomberg Intelligence sees a scenario where crude could rebound to $108.

Wall Street is still more bullish on the sector than the overall market, seeing roughly 16% potential upside for the energy index over the next year, compared with 10% for the broader market, data compiled by Bloomberg show. What’s more, 61% of energy index companies boast a buy rating, compared with 55% for the S&P 500.

Earnings growth and steadily rising dividend payouts have been key drivers in 2022. 

“That’s the goal of energy management teams: to deliver that free cash flow so that people don’t think of these companies as just a proxy for oil prices,” Stacey Morris, head of energy research at Alerian VettaFi, said in an interview. 

Granted, earnings growth is decelerating, leaving some analysts to conclude the companies may have just seen their last great quarter of profits.

At Truist Securities, Neal Dingmann expects 18% lower free cash flow for the energy sector in 2023 as “the likelihood of a material price tailwind that helped most operators the past two years is minimal.” 

In a research note, he also said he expects oilfield services costs to rise, making it more expensive to produce the same amount of oil and gas in 2023.

And energy would hardly be immune to a potential recession. Morgan Stanley’s chief investment officer, Mike Wilson, said last week that value stocks, including in energy, are “vulnerable to the economic slowdown” and urged investors to position in defensive sectors like healthcare, utilities and consumer staples.

Others point to the divergence between high-flying energy stocks and the price of crude as evidence the shares are going to struggle. 

JPMorgan & Chase & Co.’s chief global markets strategist, Marko Kolanovic, encouraged investors to sell their oil and gas stocks in the short-term as energy shares have outperformed crude by an “enormous” margin. 

He expects share prices to fall 20% to 30% in the near-term — then bounce back sharply.  

“After that, we still believe there will be an opportunity to buy,” Kolanovic said on a Friday webcast about the outlook for 2023. “Energy stocks will rocket higher and probably again be the best-performing sector in equities.”

©2022 Bloomberg L.P.