Energy Stocks Are Having a Moment That Could Last
It’s all but impossible to know where the war in Iran is headed and when the Strait of Hormuz will open up. Whatever the end game, it looks like oil pricesare likely to stay higher, maybe much higher, for longer.
That means many investors who for years have shunned energy stocks may have to rethink their stance. Trouble is, given a sudden, sharp jump invaluations, any adjustment will need to be made over time, not in a knee-jerk way.
Investors have been underexposed to energy stocks for some time. Since 2021, for example, more funds have flowed out of energy-sector ETFs than into them, versus a net inflow for all sectors, according to data from State Street Investment Management.
Meanwhile, even after the rally this year, the energy sector makes up less than 4% of the S&P 500’s market capitalization, while tech makes up 32%.This seems low. Toward the end of 2022, the most recent inflation shock, the energy sector made up more than 5% of the index. In the 1970s, energy made up a quarter of the index, according to a report from Carlyle.
There were plenty of reasons investors had shunned energy stocks. After the oil-induced inflation shocks of the 1970s and 1980s, there was a relatively long period of calm. Even the resurgence of inflation in 2021 and 2022 was relatively short-lived after supply chains normalized and sanctioned Russian oil found its way onto the market.
Cheap exports from China also helped keep prices and inflation low for along time, notes Tim Murray, capital-markets strategist at T. Rowe Price.The U.S. shale boom helped keep a lid on oil prices.
Meanwhile, low inflation came with low interest rates, making it attractive to own high-growth tech stocks. Investors were “lulled to sleep by the long period of time without inflation shocks” and de-emphasized exposure to sectors that provide inflation protection, such as energy, notes Murray.
Investors were also turned off by energy stocks’ poor returns during the U.S.shale boom, when companies gave priority to growth over profits. In addition to producers’ wildcatter spirit, there was a structural reason: U.S.producers kept finding ways to produce more oil out of the same drill length.
At the same time, worries about climate change made energy stocks, in particular oil producers, politically unpalatable for some investors.
Times have dramatically changed, and investors will have to as well.
Increasingly, it is becoming harder to dismiss an energy-driven inflation-shock scenario. Oil-market analysts say it is likely the Hormuz chokepoint, critical to global oil supply, will remain at least partially closed for sometime, despite hopes for a cease-fire.
If the U.S. leaves abruptly with Iran in control of the waterway, it is all but inevitable that fighting will resume in the region, notes Bob McNally, president of Rapidan Energy Group, calling the situation an “unsustainable equilibrium.”
A military attempt to open the waterway is no sure thing. Further escalation brings with it more potential threats to the region’s energy infrastructure
and possibly even the Red Sea, Saudi Arabia’s alternative oil-export route.
Even in the best-case scenario—say, in a negotiated settlement—analysts say resuming the flow of oil will take considerable time.
The result: The world will be in a structurally higher oil-price environment with “upwards of half a billion barrels or more of oil” that hasn’t been produced and that will have been drained from global inventory, notes Rory Johnston, oil-market researcher at Commodity Context.
And, whenever the market emerges from this crisis, oil-consuming countries are likely to stockpile more oil—adding to demand.
The upshot for investors is that there is no protection like energy against an energy-driven inflation shock.
The sector has by far the best record of beating inflation, according to an analysis from Hartford Funds that looked at stock performance between 1973 and 2025. During periods of high and rising price increases, oil-and-gas companies beat inflation 74% of the time and delivered an annual real return of about 12.9% a year on average, according to the analysis.
And while plenty of investors were burned by energy companies’ years of excessive spending, those days are over. Few wildcatters remain after a long period of consolidation.
The energy companies that survived are larger and disciplined. In any case, producers can’t raise oil output like they used to; the best shale inventory has already been drilled.
Investors wanting to up their exposure to energy stocks will have to do so cautiously. The S&P 500 energy sector has jumped 33% so far this year. The tech sector, the market’s darling for a long stretch, is down more than 7%.
And valuations are rich. The S&P energy-sector index now trades at a forward earnings multiple of around 17.5 times versus 15.8 times at the end of 2025 and a five-year average of around 13 times.
Still, investors with little to no exposure to energy stocks may need to play defense. Given how unpredictable the war is likely to be in coming weeks, there could be pockets of opportunity when headlines cause reactive selloffs.
Dan Pickering, chief investment officer of Pickering Energy Partners, puts it this way: “The more visible energy gets, the riskier an underweight position gets.”
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