The US stock market has been driven by tech giants for a while, making some wonder if diversification is pointless
The Technology Select Sector SPDR ETF’s 41% return since November 2022 dwarfs the S&P 500’s 35%, but all good things must end. With tech stocks nearing historic valuations and comprising a third of the market.
Oil stocks
They’ve been lackluster in 2024, with the Energy Select Sector SPDR ETF up just 8.7% compared to the S&P 500’s 15%. Their market cap is also dwarfed by tech titans like Nvidia, Apple, and Microsoft. Ignoring them might seem safe, but it could be a mistake.
Why Oil Stocks?
They might be the perfect hedge against a tech meltdown (stock market and trading). Since November 2022, the Energy ETF has shown minimal correlation with the Tech ETF and the VanEck Semiconductor ETF. In June, it even had a negative correlation, rising when tech fell (equities market, US stock market report). This could be crucial if the tech bubble bursts.
Energy’s Potential: Analyst Jonathan Krinsky of BTIG sees potential in oil stocks. Despite a recent dip, the Energy ETF held its 200-day moving average, a comforting sign for investors. A breakout above $91-$92 could signal a new uptrend.
Oil Prices Fuel the Fire: For oil stocks to rally, oil prices need to hold steady or climb (US oil futures trading). WTI crude has gained 10% since June 4th, and experts like J.P. Morgan’s Natasha Kaneva see further increases. Strong demand and limited OPEC exports point towards a potential $84 average for Brent crude in Q3 2024, with a peak of $90.
Stocks to Watch: This bullish outlook benefits the Energy ETF and oil stocks that held their 200-day lines, including Coterra Energy, EOG Resources, and Occidental Petroleum (a Warren Buffett favorite). Exxon Mobil also stands out. UBS analyst Josh Silverstein calls it the “best stock to own…for the next five years” due to its potential for earnings growth and capital return, even without rising oil prices.
Exxon Mobil’s Allure: Strength in refining, cost reductions, new oil projects, a strong balance sheet, and even low-carbon investments position Exxon Mobil for success. Analyst estimates put its price target at $154, a 35% jump.
The Takeaway: While tech has dominated the US market, diversifying with oil stocks could be a strategic move, especially if oil prices continue to climb. This strategy could provide a hedge against a potential tech downturn.
