Energy stocks: Keep them, just don't expect them to outperform this year, strategist says

Don’t dump your energy stocks, but don’t expect them to outperform the broader markets this year, according to one strategist.

The outlook for the sector is “not as rosy as we move towards the last seven months of 2023,” says Matt Maley, chief strategist at Miller Tabak.

His firm turned bullish on energy stocks in October 2020, around the time when Wall Street was mostly bearish following negative oil prices.

“Sure enough, shortly after we turned bullish, the XLE (XLE) energy stock ETF began a more than 2-year rally that took the ETF higher by 240%...and an even bigger advance in the XOP (XOP) oil & gas E&P ETF of more than 325%!!!,” wrote Maley in a note to investors.

The energy sector is getting oversold on very-near-term basis as XLE down 11.3% year-to-date. The sector is due for a short-term bounce at some point over the next couple of weeks, says Maley.

“However, on a longer-term basis, we’re turning more cautious on the group,” he added. “This is not a bearish call…it’s a less bullish one.”

“We think it will have a much tougher time outperforming the broad market to the degree it has on many occasions over the past 2.5 years,” he said.

FILE - The sun sets behind an idle pump jack near Karnes City, Texas, April 8, 2020. Texas can feel like a study in contrasts. One example being that the state is famed for its oil industry, but is the producer of a quarter of the country’s wind energy and a leader in solar power. (AP Photo/Eric Gay, File) (ASSOCIATED PRESS)

The reasons are both fundamentally and technically based. Demand for gasoline and diesel fuel is down year-over-year while the recent banking turmoil adds to recession concerns.

On the supply side, Russian crude is still finding its way into the international market despite Western sanctions, keeping a lid on prices.

“Therefore, we are not saying that investors should dump their energy names. Many of them still pay a very nice dividend yield,” said Maley.

These stocks will “pay you to wait” if or when the economy moves into a recessionary period, “so they should remain solid holding for most investors.”

Just don’t expect them to outperform anytime soon.

Ines is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre

Click here for the latest stock market news and in-depth analysis, including events that move stocks

Read the latest financial and business news from Yahoo Finance