Morning Notes — Near-Term SPX Targets and the Energy Sector

We initiated positions in the Energy sector more than 9 months ago because it was inexpensive and we wanted to own ‘value’ sectors given expectations for a strong cyclical recovery. The group began reaching earnings growth metrics back in Q4’21 and Q1’22 13F filings (released in April) from growth managers included more additions from the Energy sector than any other.  The Energy sector seems to be ticking a lot of boxes lately as it’s both ‘value’ and ‘growth.’  And tomorrow, the Energy sector will be pulled into the 12-month rolling ‘momentum factor.’ Hedge funds, systematic strategies and ETFs that use the momentum factor will start including Energy equities that now make up just ~4% of the S&P 500.  Note, the sector averaged a ~12% weight during its last bullish cycle that ran from ~2005-2014 before peaking at a ~20% weight.  The move from a ~4% weight to ~7% will likely take time, but the move from ~8% to ~12% will likely be far more rapid as investors then realize their lack of exposure is hurting relative performance.  The Energy sector is ready for a top-down and bottom-up rerating as equity risk premia compress.