US energy shares surge: Investors are flocking to US energy shares, capitalising on surging oil prices and seeking protection against potential inflation, which has shown unexpected resilience.

The S&P 500 energy sector has surged approximately 17 per cent in 2024, outpacing the broader index's year-to-date return and becoming the best-performing sector in the past month.

The rally in energy stocks is largely attributed to the 20 per cent increase in US crude oil prices this year, driven by a robust US economy and escalating tensions in the Middle East.

Investors are also eyeing energy shares as a hedge against inflation, which has been more persistent than anticipated, potentially restraining the broader stock rally.

Ayako Yoshioka, senior portfolio manager at Wealth Enhancement Group, highlighted the importance of having commodities exposure as a hedge against inflation, leading to overweight positions in energy stocks, including oil giants like Exxon Mobil and Chevron.

Leading the charge in the energy sector this year are Marathon Petroleum, up 40 per cent, and Valero Energy, up 33 per cent.

The upcoming week will be pivotal for the economy as first-quarter earnings reports from companies like Netflix, Bank of America, and Procter & Gamble are expected. Additionally, the retail sales data will provide insights into consumer behaviour, following another stronger-than-expected inflation report last Wednesday.

The surge in energy stocks reflects a broader shift in investor sentiment, moving away from growth and technology stocks that led the gains last year. However, continued inflation concerns and a hawkish stance from the Federal Reserve could dampen investor appetite for non-commodities-related sectors.

Despite the recent surge, analysts remain bullish on energy shares, citing comparatively low valuations and strong economic fundamentals. The S&P 500 energy sector trades at 13 times forward 12-month earnings estimates, compared to nearly 21 times for the overall S&P 500.

While oil prices could face downward pressure if Middle East tensions ease or global growth falters, strong economic growth could bolster corporate profits and drive investors towards sectors like industrials and financials, which have also performed well this year.

Analysts advise managing portfolios for a range of outcomes, considering the uncertain economic environment and the potential for a Fed rate cut in June if the economy begins to slow.

(with Reuters inputs)