Why the stock market keeps changing its story
As the Magnificent Seven are downgraded to the Fab Four, perhaps the list of leading tech stocks should include an old-school name: Exxon Mobil. The oil company’s shares would come in fourth in the septet this year with a rise of 21%, after Nvidia and Meta and very close to Amazon. Behind Exxon’s surge to a new high on Friday is an important shift in the market, a new narrative that investors would be wise to pay close attention to—in case it changes again.
Exxon is at the heart of two stories: Strong demand for oil because the global economy is stronger than expected, and supply problems because of wars in Ukraine and the Middle East. Both were on show this week, as oil rose on strong jobs figures Friday, a day after it was pushed up by concern of Israel-Iran escalation on Thursday. Oil stocks are winners from both stories, while most of the market prefers one or the other.
Until recently, investors had been focused on falling inflation bringing down bond yields. That was good for growth stocks, already winners thanks to excitement about artificial intelligence. Markets haven’t forgotten about inflation, but they put it aside in favor of a focus on the stronger-than-expected economy, which boosts demand for oil.
The S&P 500 energy sector, the biggest member of which is Exxon, is now ahead of the tech sector for the year and on Friday passed communication services, in which Meta and Alphabet sit, when dividends are included. The energy sector’s valuation has risen to its highest since the Federal Reserve started raising interest rates in March 2022, using the price-to-forward-earnings ratio. Investors love to distill the bewildering variables that move prices around into a single narrative.
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