The energy sector is demonstrating strength with a "compelling valuation" that could set stocks up for a comeback after underperforming the broader market since September, according to Morgan Stanley. Strategists led by Michael Wilson upgraded the sector to overweight, anticipating the market rally should broaden and rotate into energy stocks — as long as they can deliver on earnings growth.
"Yet it remains one of the cheapest and most under-owned areas of the market," Wilson told clients Monday. The energy sector's performance has also lagged the price of crude oil this year, but the divergence is likely to close, according to Wilson. The S & P 500 energy sector is up more than 11% in 2024, while West Texas Intermediate futures have gained 14%. The broader S & P 500 has added 9.5% year to date.