The Zhitong Finance App learned that as the Middle East conflict continues, hopes for a short-term cease-fire agreement between the US and Iran weaken, and international oil prices remain high, US energy stocks are once again being sought after by capital. The S&P 500 energy sector index rose 1.8% intraday on Tuesday and is approaching the all-time high set earlier this year.
If gains continue until the close on Tuesday, the S&P 500 energy sector index will hit a record closing high and set a new record for the first time since March 27. Earlier this year, the war in the Middle East and supply risks in the Strait of Hormuz drove a sharp rise in energy stocks, but as negotiations between the US and Iran began, market concerns about geopolitical risks cooled down, and the energy sector then fell by up to 16% from its high point.
However, as the cease-fire was delayed, energy stocks strengthened again since the beginning of July. Up to now, the sector has rebounded about 20% from the low it hit on July 1, once again approaching its previous high.
Rob Thummel, senior portfolio manager at Tortoise Capital, said that many investors missed the first round of energy stock gains before, so they were unwilling to miss the opportunity again when the second round of the market appeared. At the same time, global geopolitical risks are still high, and the importance of energy stocks in investment portfolios is still rising even if oil prices are likely to fall in the future.
Since this year, due to supply restrictions caused by the Middle East war, Brent crude oil futures have increased by about 50% cumulatively. High oil prices not only drove energy stock valuations back up, but also significantly improved the profit and cash flow performance of major US oil companies.
Chevron (CVX.US)'s second-quarter earnings per share increased by more than 240% year over year, while ExxonMobil (XOM.US)'s earnings increased 115% over the same period. Additionally, Chevron is expected to generate approximately $12.5 billion in additional free cash flow in 2026. Thummel pointed out that the improvement in the cash flow of these companies was not entirely due to rising oil prices, and measures such as improving the efficiency of the companies' own operations and share repurchases also played an important role.
Nor are the dividends from tight energy supplies limited to oil producers. Refining companies are also benefiting from the tight supply of refined oil products. Valero Energy (VLO.US) announced its best quarterly results in terms of earnings per share in July this year, while PBF Energy (PBF.US) and HF Sinclair (DINO.US) also recorded the strongest earnings performance in many years.
Melius Research analyst James West believes that in a situation where corporate profits continue to grow and the tight supply of refined oil products such as diesel and aviation fuel is likely to continue for several years, current energy stock valuations are still attractive. The market is gradually taking into account expectations that future oil prices and refined oil prices may remain at a higher level for a long time, so there is still room for further growth in energy stocks.
However, if the US and Iran finally reach a cease-fire agreement and push oil prices back down in the future, the profit growth rate of energy companies may still slow down. However, analysts believe that even if a cease-fire occurs, energy stocks will not necessarily repeat the previous sharp sell-off. West said the market has become more aware that even if a memorandum of understanding or a temporary cease-fire is reached, there is still great uncertainty about whether it can be maintained in the long term.
As the situation in the Strait of Hormuz continues to stagnate, geopolitical risks, high oil prices, and strong free cash flow from energy companies are jointly supporting sector performance. If current gains continue, US energy stocks are expected to reach new all-time highs again.