Energy Musings - January 3, 2026
Energy stocks performed surprisingly well in December given the highly negative sentiment about oil prices and the potential for a supply glut in 2026. Many factors influence energy stocks.
Energy Finishes 2025 In 8th Place Out Of 11 Sectors
The stock market continued its strong performance in 2025, posting a gain of nearly 18% for the Standard & Poor’s 500 Index. The year was the third consecutive year of double-digit increases for the Index. Interestingly, except for 2022’s double-digit loss, the Index has posted double-digit gains annually since 2019. Despite the elevated stock market valuation, Wall Street investment strategists remain confident that the good times will roll on in 2026. However, not all strategists foresee a fourth double-digit gain.
A December 31, 2025, CNN article says that “The S&P 500 ended 2025 at 6,845.5 points. Analysts at Bank of America expect the benchmark index to hit 7,100 by year-end 2026, suggesting a roughly 3.72% gain from now. Meanwhile, analysts at Deutsche Bank expect the S&P to hit 8,000 points by year-end, suggesting a gain of 16.87%.”
CNN continued, “When the S&P 500 has gained at least 15% in a year, the following year’s returns have averaged about 8%, according to Adam Tumquist, chief technical strategist at LPL Financial.” They noted that there is usually a decline of about 14% at some point during the year, after which the Index recovers and rises to a higher year-end value. In other words, be prepared for a significant market correction at some point during 2026.
Energy posted another month in the upper ranking of sectors, beating the market.
Our chart above shows that the S&P 500 Index eked out a 0.2% gain for December, as more than half of the 11 sectors posted negative results for the month. That is not surprising, as investors worried for much of the year about a bubble developing for technology stocks that have been driving the market higher for the past three years. The bubble concern stems from massive investments in data centers to support the explosive growth in the use of Artificial Intelligence. Investors worry that the capital investment splurge is outpacing the companies’ cash flow generation, forcing them to borrow substantial sums. The massive increase in borrowing will significantly alter these companies’ balance sheets, putting pressure on future profit margins. Lower profit margins will inflate stock valuations based on per-share earnings, putting them at greater risk of a profit stumble and driving investors to dump the stocks.
Despite falling oil prices and growing concern about a massive supply glut in 2026 that could send prices below $50 a barrel, energy stocks posted a monthly profit slightly above that of the overall Index. Energy finished the month in the same sector position as it did in November – fifth place.
The energy story in 2025 was all about the oil price. As our chart of daily spot oil prices in 2025 shows, despite a brief rally above $80 a barrel early in January in anticipation of positive industry actions from the incoming Trump administration, the trend was for a steadily lower oil price. Moreover, expectations for a lower price in 2026 grew as we moved through the second half of 2025, as oil consumption growth lagged and supplies increased. Pessimism for oil prices remains high. Surprisingly, the energy stocks did better than the underlying investment sentiment would have suggested.
Oil prices slid steadily lower as 2025 evolved.
The following table shows the monthly investment ranking within the S&P 500 Index for the energy sector, along with the sector’s monthly performance and the average spot oil price.
Energy’s 2025 monthly conditions.
The following table shows the annual sector performance for 2003-2025. While the chart is visually challenging, we suggest that readers focus only on the green squares. They show the energy sector’s ranking each year, from highest to lowest. Energy’s annual rankings are not surprising when one examines the following chart of oil prices for the 2003-2025 period. Oil prices influence the earnings of producers and oilfield service companies, and higher profits and shareholder cash and stock price returns drive share prices.
Energy seems to be rising from its disastrous 2014-2020 era.
The last two decades of oil prices show the industry’s ups and downs.
While lower oil prices will weigh on energy stocks, it is essential to understand that the stock market is a discounting mechanism. Share prices anticipate improving earnings for companies, so the market understands that low oil prices will discourage reinvestment in finding new reserves and sustaining and growing future production. As the International Energy Agency (IEA) has finally conceded, oil demand will likely increase by double-digit percentages by 2050, meaning we will be consuming at least 10 million more barrels per day than we did in 2025. To meet that demand growth, the industry must find more resources and bring them into production during the next 25 years. This will only happen if the sector earns more money, which means that oil prices need to rise in the future. What is unknown is when the future will arrive.
There is an expression on Wall Street that “the trend is your friend.” It means investors wish to align with the sentiment moving stock prices if they hope to maximize their profits. What you don’t want to do is “overstay” a trend. Many on Wall Street are trying to gauge sentiment and anticipate when it switches. We spent many years in that role, and know how challenging it is to perform well. We can assure you that it is lonely when you advise that the trend is no longer your friend as share prices continue to rise. But it is nice when the trend reversal emerges.
The other ingredient influencing energy stock prices is investment flows. As the stock market has begun to see investors remove money from technology-oriented sectors due to inflated valuations and concerns about future earnings growth rates, that money will need to find new stocks to invest in. As usually happens when stock markets begin sector rotations, cash flows from over-valued to under-valued sectors. Energy is currently in the undervalued category of industries, so investment funds flowing into the sector could drive share prices up despite lackluster earnings results due to currently weak oil prices.
Welcome to 2026. It will be an interesting year given industry fundamentals, geopolitical tensions, and government policies. The interaction of these forces will be fascinating to study. We look forward to analyzing the developments.
Nothing we say here should be considered investment advice.