Wall Street Stubbornly Bullish on Energy Stocks

Wall Street analysts have high hopes for oil and gas stocks, encouraged by cheap valuations and President Donald Trump’s boosterism of the beleaguered energy sector. 

Energy boasts the highest percentage of buy-rated equities among the 11 sectors in the S&P 500 Index: roughly three in four members have buy recommendations, compared with roughly half in the broader market, according to data compiled by Bloomberg. Plus, sell-side analysts see energy stocks rising about 16% over the next 12 months, second only to the health-care segment and roughly double the projected gain for the overall index.

Energy stocks — one of three index segments in the red this year — appear to have room to run. They’re the cheapest S&P 500 sector based on price-to-earnings ratio, and Trump is a cheerleader for the industry, calling for companies to “drill, baby, drill.”

“The thesis that some people have is that multiples and valuations are very, very low right now,” Leo Mariani, analyst at Roth Capital Partners, said in an interview.

Looking further into the future, the sector is expected to post the highest earnings growth in 2026, according to Bloomberg Intelligence.

Challenges ahead

Of course, it’s understandable why investors may be skeptical about Wall Street’s bullish take.

US crude prices have dropped about 7% this year, hurt by the fallout from Trump’s trade war and a drive by OPEC+ to restore curbed supplies. Also, the sector doesn’t have much momentum: Energy stocks have underperformed the market for four of the last five quarters.

BMO Capital Markets expects US energy producers’ second-quarter earnings to fall 30% compared to the first three months of the year, and for cash flows to drop 15% in the same period because of weaker crude prices, according to analyst Phillip Jungwirth. 

“Is there a catalyst to dramatically change that and reverse that over the next 12 months? I’m not sure there’s anything that’s super clear,” Roth Capital’s Mariani said, adding that sentiment in the sector is weak among institutional investors. His price targets for the sector are generally lower than many on the Street.

Still, there are reasons to consider the stocks. For one thing, energy stocks have a history of protecting investors against accelerating inflation. They were the top-performing sector in 2022, when US consumer prices were surging. That role as a hedge may come into play again amid the risk that Trump’s tariffs lift prices in the months ahead.

Then there’s Trump’s spending bill, which removed credits for renewables and gave oil and gas producers some benefits, even if that hasn’t led to an immediate rally in energy stocks. 

Wall Street analysts may be waiting on further moves from the White House, according to Michael Casper, senior equity strategist at Bloomberg Intelligence. 

“Trump was touted as someone that would help US energy producers,” he said in an interview.  

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