Oil prices continued to hit a new five-month high, boosted by geopolitical conditions, as the U.S. stock market, which had been steadily rising, suffered violent turmoil this week.
The performance of tech giants continued to diverge, with Apple, Nvidia, and Tesla falling 1.1%, 2.5%, and 6.2% respectively, with Meta leading the way with an 8.6% increase, Amazon up 2.6%, and Microsoft and Alphabet up about 1.1%.
And the downgrade of the "Big Seven" to the "Big Four" comes as energy stocks are outperforming tech stocks.
So far this year, the S&P 500 energy sector has outperformed the technology sector, outperforming the communication services sector where Meta and Alphabet are located on Friday if dividend earnings are added. Looking at forward P/E ratios, valuations in the energy sector have risen to their highest levels since March 2022, when the Fed began raising interest rates.
And after this week's turmoil, the list of winners should be added with an old name – ExxonMobil.
ExxonMobil, the largest constituent of the S&P 500 energy sector, has risen nearly 5% this week and hit a record high, and has risen 21% this year, ranking fourth among the Big Seven, behind Nvidia and Meta, and on par with Amazon.
ExxonMobil is sought after by the capital market for two reasons: one is due to stronger-than-expected global economic performance and strong oil demand, and the other is supply chain disruptions caused by geopolitical crises such as the Russia-Ukraine conflict and the Middle East conflict.
At the same time, the logic of the market is changing significantly, and some time ago, investors have been focusing on the decline in US Treasury yields due to the fall in inflation, and the concept of artificial intelligence, which is good for growth stocks dominated by technology stocks. Now, the market has not forgotten about inflation, but is more focused on the positive factor of faster-than-expected economic growth.
Some predict that stubborn inflation will prompt central banks to delay interest rate cuts, ultimately leading to a slowdown in the economy. Currently, oil stocks offer a new way to bet on economic growth, and even if geopolitics end the growth narrative, they can provide some protection for investors.
The focus is shifting from falling inflation to economic growth
All along, the market has not let go of any signal to release the resurgence of inflation, so good news for the economy is seen as bad news for the market, and vice versa is seen as good news for the market.
Especially in 2024, supported by Fed Chairman Jerome Powell's interest rate cut signal, U.S. Treasury yields have fallen sharply, and U.S. stocks have been soaring. By early January this year, investors even expected the Fed to cut interest rates as many as six times throughout the year, and every hint of interest rate cut expectations became a boost for U.S. stocks.
Both the market and the Fed believe that inflation is steadily pulling back towards the Fed's 2% target.
Since then, the focus has shifted to economic fundamentals. Economic growth was better than expected, and the dot plot released in March predicted only three rate cuts this year, which was not as good as the market had previously expected, but investors were not worried and cheered for the rate cut, which was seen as evidence of the economic stability.
So far, the cognitive transformation from the good economy is bad to the good economy is good.
However, there are limits to economic growth, and at the heart of those limitations is oil prices. When the economy is fully recovered, oil prices rise and consumers spend more at gas stations. If demand is too high, a spike in oil prices means that other areas of the economy are hurt.
This is also true for other commodities, albeit to a lesser extent. According to the latest PMI data, the price of raw materials rose sharply in March, and the price increase of the company itself also hit a new high in nearly a year.
Inflation-sensitive commodity prices such as oil, gasoline, copper and gold have risen recently (gold hit a new high on Friday), which could signal a new round of inflation triggered by economic growth, reigniting investors' fears of rising prices.
The strong economy has also challenged financial limits, as reflected in the trend of interest rates, with the US manufacturing PMI hitting a two-year high in March, pushing the 10-year Treasury yield sharply higher this week, at one point approaching 4.4%. On Friday, the benchmark yield approached this level again, spurred by larger-than-expected non-farm payrolls data.
Will the logic of the market change again?
It is worth noting that the market logic may change again in the future.
Some analysts said that the surge in U.S. Treasury yields on Tuesday was again seen as a bearish factor for U.S. stocks. In the past few months, the consensus for higher yields is a sign of a strong economy, which is good news for equities.
Shamik Dhar, chief economist at BNY Mellon Investment Management, believes that if the market shifts from focusing on the Fed to reducing the number of rate cuts to preparing for actual rate hikes, it will be a major turning point in market logic. "That's when you're going to see a major logical shift. "
"The market favors relatively simple logic," he said. ”
Investors like to distill a concise narrative thread from complex influencing factors. Once the market agrees on "what is driving the market", the narrative may self-fulfil until a new narrative emerges.
Geopolitics are frequent, and oil stocks are ushering in opportunities
So, does oil giant ExxonMobil deserve to be on par with the tech giants?
The difference between the oil majors and the tech giants is that oil producers benefit not only from the growth-driven inflation cycle, but also from supply-side tightness.
The recent global geopolitical conflicts, such as Ukraine's attack on Russian oil facilities, Yemen's armed forces in the Red Sea, and the risk of an Israeli-Iranian conflict, have all exacerbated concerns about global oil supply and supported oil prices.
According to a Goldman Sachs report, U.S. crude oil production in the Lower48 region is nearly 400,000 b/d below its peak in December, while Russia's liquid oil production forecast will slip to 10.2 million b/d due to a decline in refining due to ongoing drone attacks since January.
Goldman Sachs believes that the continued disappointment in crude oil production hinted at by the U.S. pipeline, while the decline in Russian crude oil production and the continued elevation of the risk of more attacks on Russian oil infrastructure have added to market concerns about tight supply.
Goldman Sachs expects a supply-demand gap of 350,000 b/d for crude oil in the second quarter, and despite upside risks, consolidation remains the base case, given the uncertainty of U.S. and Russian supply, as well as overvalued time spreads and speculative positioning.
The analysis believes that at a stage where economic growth is pushing inflation higher, but it has not yet reached the point of getting out of control, non-energy stocks, especially value stocks with lower valuations, should perform well. But if there is an oil supply shock, only oil stocks will be able to enjoy the dividends alone, while others will suffer from slower growth, recession and even stagflation.
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