Key insights
- Ed Yardeni suggests overweighting the S&P 500 Energy sector due to a recent selloff and expectations that oil prices will remain elevated even with a ceasefire in the Middle East. He cites infrastructure damage, increased maritime insurance costs, and strong U.S. crude output as supportive factors. Oil and gas equipment stocks are highlighted. The recommendation also serves as a hedge against renewed conflict.
Investing.com -- Yardeni Research is turning bullish on the S&P 500 Energy sector, recommending investors overweight the group following a recent selloff tied to ceasefire optimism in the Middle East.
"We are inclined to use the recent selloff to overweight the sector," founder Ed Yardeni wrote, arguing that even if the war ends, oil prices are unlikely to return to pre-conflict levels.
Yardeni Research expects Brent crude to fluctuate between $75 and $95 per barrel, above the prior range of $55 to $75, citing physical damage to energy infrastructure around the Arabian Gulf and "fundamental changes in maritime insurance and transit confidence" that would prevent an immediate normalization of flows even if the Strait of Hormuz fully reopened.
The firm said the sector’s low index weight makes it easy to overweight, with Energy accounting for just 3.3% of the S&P 500’s market cap. Yardeni Research recommends a 5% to 10% weighting.
Within the sector, oil and gas equipment and services stocks are flagged as the most leveraged play on oil prices, with the potential for significant infrastructure rebuild orders.
Yardeni Research also pointed to structural tailwinds underpinning the domestic industry, noting that U.S. crude output currently stands at 13.6 million barrels per day, with the country now a significant net exporter. Many energy stocks also offer attractive dividend yields, the firm added.
"Overweighting Energy stocks might be a good hedge against a resumption of the war," Yardeni wrote, noting that the current ceasefire is scheduled to expire April 22 and that Iran has refused further negotiations unless the U.S. ends its blockade of Iranian ports.