Analyst lifts Energy sector to Buy on 'strong breadth and compelling valuation'

investing.com:

On Monday, Morgan Stanley equity strategists raised their rating on the energy sector to Overweight, citing “a combination of inflecting relative earnings revisions, strong breadth and compelling valuation.”

“The recent stability of crude prices also points to a catch up in both relative performance and earnings growth, in our view,” strategists said.

In their analysis, Morgan Stanley strategists highlighted a significant upturn in the MSCI All Country World Index of approximately 25% over the past five months, alongside robust gains across various asset classes.

This surge is attributed mainly to more lenient financial conditions and a reduction in capital costs, spurred by the Federal Reserve's dovish pivot in the fourth quarter.

For further growth in U.S. markets, particularly in terms of multiple expansion, an increase in earnings forecasts for 2024 and 2025 is crucial, given that these expectations have remained stagnant since last October, strategists explained.

Moreover, with the Fed's diminished focus on inflation, reflationary trades, especially within commodity cyclical sectors, are gaining momentum, supported by strong market breadth.

“On this front, large cap Energy is a classic late cycle winner that has underperformed the market materially since last September, but has shown strong relative performance and breadth recently,” they wrote.

“As we lay out in today's note, we think this recent outperformance continues. We recommend staying up the cap and quality curve within the sector.”

The energy sector's performance against the S&P 500 hasn't matched crude oil's year-to-date gains, strategists noted. However, with a revised Brent forecast of $90 per barrel by the third quarter due to tightening