Energy sector stocks: Is now the time to invest?

After starting the year as one of the top-performing S&P 500 sectors, energy stocks retreated in the second quarter, lagging the broader stock market. ¹ However, year-to-date (through June 13, 2025), the S&P 500 energy sector remains in positive territory, gaining 3.92%

Energy stocks have exhibited significant volatility in recent years. For example, S&P 500 energy sector annual returns varied from -33.68% in 2020 to 65.72% in 2022, then to 5.7% in 2024. ¹ Energy stock performance is often closely linked to underlying energy prices. Most important are crude oil prices, which moved within a wide range in 2025’s first six months. In mid-January, crude oil surpassed $80 per barrel. By early May, oil prices had dropped below $60 per barrel. Prices rebounded since, most notably in the wake of the Israel-Iran conflict that emerged on June 13. ²

Crude oil prices are often volatile during periods of geopolitical instability. Because the Middle East is a significant source of the global oil supply, the Israel-Iran conflict could exacerbate price fluctuations. “The latest conflict adds to the list of global hotspots,” says Eric Freedman, chief investment officer with U.S. Bank Asset Management Group. “We’re still closely watching issues like the Russia-Ukraine war and tensions between China and Taiwan, along with Middle East conflicts.”

Energy’s economic role

Energy supplies and prices have a significant economic impact. An oil price surge following the Russia-Ukraine war contributed to 2022’s inflation bout. As a key input to transportation and production, energy prices have a residual impact on goods and services costs.

Freedman believes a confluence of events is unfolding, exacerbating current energy price instability. “Along with geopolitical concerns, OPEC and non-OPEC countries are trying to balance the need to preserve market share while not growing production too quickly and driving prices lower,” says Freedman. “Oil-producing countries have decisions to make on just how much to produce while trying not to outstrip demand.”

A third variable that comes into play is the extent to which energy companies expand oil exploration. President Donald Trump has promoted a pro-drilling regulatory environment. “If oil prices are too low, there’s a question of how incentivized companies are to pursue additional oil reserves aggressively,” notes Freedman.

Possible trade disruptions represent an additional issue that could impact energy supplies. “It’s not easy to move petrochemicals from Point A to Point B, and more restrictive trade could prove to be another hurdle,” says Freedman. President Trump is pursuing aggressive tariff policies, resulting in a more challenging global trade environment. Conflict zones also impact shipping activity. In response to Israel’s attacks on the Gaza Strip, attacks by Yemeni-based Houthi rebels have curtailed some Red Sea shipping, which also has an impact on crude oil deliveries.

All these factors, says Freedman, create a more unpredictable environment for energy prices in the near term.

The U.S. is the world’s largest oil producer. With production gains over the last decade, the U.S. transitioned from a net importer of crude oil to a net exporter. ³

According to the U.S. Energy Information Administration, U.S. crude oil production is expected to taper from current levels by 2026.

Energy prices in flux

Energy prices peaked in 2022 as demand surged with the end of COVID-related shutdowns and the onset of the Russia-Ukraine war. By the end of 2024, prices for all forms of energy were significantly below 2022 peaks. In early 2025, natural gas prices trended higher, but by mid-June, dropped by nearly 25% from the year’s peak levels. At the same time, oil prices dropped significantly early in the year, but by June, were on the rise. So far in 2025, energy prices have a mixed track record. ³

All prices published by U.S. Energy Information Administration. Crude Oil price per barrel: West Texas Intermediate (WTI) – Cushing, Oklahoma as of June 13, 2025. Gasoline price per gallon: U.S. Regular All Formulations as of June 9, 2025. Natural Gas price per million BTU: Henry Hub Natural Gas Spot Price as of June 9, 2025. Heating Oil price per gallon: No. 2 Heating Oil Prices: New York Harbor as of May 12, 2025.

Traditional energy forms still dominate the market

Renewable energy sources such as wind and solar are part of the energy picture today as efforts are made to reduce fossil fuels’ carbon footprint. Still, renewables make up less than 25% of U.S. electricity generation. ⁴

“Alternatives like wind and solar are not a factor in the S&P 500 Energy Index to this point,” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management Group. “In some cases, they may be represented in other sectors of the market, such as utilities or information technology.”

Investment considerations in today’s energy market

Investors primarily direct Energy sector allocations toward more traditional companies that participate in industries like oil and natural gas. “The demand for fossil fuels is not going away in the near term,” says Haworth. He emphasizes that opportunities are available even in a market featuring unpredictable prices. “Many exploration and production companies have productive oil wells and should be able to generate solid profit margins,” says Haworth. “Since these companies tend to return capital to shareholders in the form of dividend payouts, their stocks represent an opportunity for income-orientated investors.” Based on data as of May 31, 2025, the S&P 500 energy sector generates a 3.3% dividend yield, compared to 1.3% for the broader S&P 500. ¹

Source: U.S. Bank Asset Management Group, Bloomberg; 5/30/2022-5/30/2025

Other opportunities can be found among so-called midstream energy companies that transport crude oil or refined petroleum products. “This sector is less dependent on energy prices than on the flow of oil, and volume moving through these facilities remains high,” says Haworth. Midstream companies tend to pay attractive dividends. However, the investment process can be more complex as it sometimes requires investments in limited partnerships. Partnerships issue K-1 forms to investors for tax reporting purposes, which can complicate an investor's tax filing process. Overall, energy and midstream companies tend to pay higher current income in the form of dividends and trade at cheaper valuations as measured by price-to-earnings multiples but also present lower earnings growth and lower margins in contrast to broader equity indices like the S&P 500 or technology-heavy Nasdaq 100.

Consider consulting with your financial professional to determine whether targeted investments in the energy sector can help you meet your long-term financial goals.