March 24, 2023

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It appears that energy stocks have become a popular indicator for concerns regarding how deeply the coronavirus’s Delta variant would affect the US economy, as the reopening trade that had given some parts of the market a boost earlier in the year now continues to stumble. There was a 12.3% decline in the S&P 500 energy sector for the quarter, whereas the S&P 500 has seen 3.7% gains, which is near record highs. This is in direct contrast with the performance of the sector in the first quarter of the year when it had surged 29.9% over expectations that energy demand would see a boost due to vaccine-fueled economic rebound.

This decline has managed to outstrip a fall of 2% in the price of Brent crude. It suggests that some investors are of the opinion that the economic recovery in the United States may have peaked after a resurgence of the coronavirus. This has led them to focus on an upcoming unwinding of the easy monetary policies that have helped the S&P increase twofold after its lows of March 2020. Other reopening plays like hotels and airlines have also stumbled, as investors have once more turned towards the high-growth tech stocks that have been leading the markets for years. 

This quarter, there has been a 6.8% increase in the S&P technology sector. Investment strategists said that an increase in the number of coronavirus cases due to the delta variant has pushed investors to turn towards defensive stocks like tech again. The reopening stocks appear to be underperforming slightly. Next week, investors will be able to get access to additional readings regarding the health of the US economy. This is because consumer price index figures will be revealed, along with retail sales and measures of consumer sentiment. As of now, most people are trying to gauge how asset prices would be affected by a slowing economic bounce.

In the past week, when Morgan Stanley lowered its recommendations pertaining to US equities, it cited concerns relating to slowing growth. Likewise, Goldman Sachs’ economists had also cut their estimates relating to US economic growth to 5.5% in the third quarter, from the 9% highlighted in late August. These worries have taken their toll on energy stocks, with companies like Chevron Corp and Exxon Mobil Corp down by almost 13% for the quarter. Market experts said that the last couple of months had been a painful trade with investors moving out of their crowded positions in energy stocks that had experienced a rally in the beginning of the year. 

However, there are investors who continue to remain bullish on energy stocks, due to expectations that the eventual fall in COVID-19 cases will lead to economic growth. The overall prices in the energy sector seem to be reflecting the oil prices per barrel of $50, which are way below their level for brent oil at $72.50. This decline has also made some energy stocks quite cheap, as relative to the values they had earlier this year. 

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