- "With no resolution to the current energy crisis in sight, Energy sector remains in a particularly sweet spot," JPMorgan said.
- The sector has attractive valuations and strong fundamentals, the investment bank said in a Thursday note.
Rising revenue is among the features that make the S&P 500 Energy Sector a standout investment opportunity, according to JPMorgan.
"With no resolution to the current energy crisis in sight, Energy sector remains in a particularly sweet spot with very attractive valuations, strong fundamentals and significant improvement in quality," Dubravko Lakos-Bujas, chief US equity strategist, said in a research note published Thursday. He said the sector is the most favorable based on various quant models.
Energy stocks have been propelled higher this year in part on the back of a surge in oil prices. Brent crude, the international benchmark, and West Texas Intermediate crude oil prices spiked after major oil producer Russia invaded Ukraine in February, stoking supply worries and prompting sanctions against Moscow.
The energy sector this year has been the best-performing group on the broader S&P 500 index with a gain of 41%, while the overall S&P 500 has lost about 16%. The energy and utilities sectors are the only two that are higher this year while nine other groups are in the red.
The energy sector started coming off its highs of the year in June alongside a softening in crude prices, which themselves are still up for 2022.
"Currently Energy is trading at an extreme ~10x PE discount vs market," said the investment bank.
It said the sector's strong fundamentals remain anchored to rising revenues on sharply higher prices and hedges rolling off, the strong US labor market, "resilient" demand from major oil importer China, and the global reopening after the height of the COVID pandemic. Marko Kolanovic, JPMorgan's chief global market strategist, recently said he expects oil prices to reclaim the $100 per barrel level in the second half of 2022.
Another reason to be bullish on the energy sector is the pursuit of energy independence in developed markets with about one-fifth of global oil capacity sanctioned.
"Unsurprisingly, energy policy is starting to become less restrictive as developed countries look to tackle the oil & gas crisis. At the same time, based on our meetings, investors are increasingly becoming cautious and skeptical of their [Environmental, Social, and Corporate Governance] allocations and frameworks due to continued underperformance," the note said.
JPMorgan said the energy sector should deliver strong relative growth, with upside to current consensus estimates, rising capital return at very cheap valuation, while its balance sheet keeps strengthening.
Chevron, Exxon Mobil, Halliburton and Baker Hughes are among the stocks that make up the S&P 500 energy sector.