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BofA’s equity and quant strategists advise being selective rather than investing in the S&P whole hog. Its commodity research team raised its price target on Brent crude prices.
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Since the initial strikes on Iran, the S&P 500 has fallen about 4% while a fund holding the index’s biggest energy stocks is up 5%.
Sometimes the best trade can be the obvious one.
The war in Iran appears to be at an impasse, with the effective closure of a key water passageway driving energy experts to raise the alarm on disruptions to the crude oil supply. Energy executives including those from ExxonMobil (XOM), Chevron (CVX), and ConocoPhillips (COP) reportedly warned White House officials last week that the situation around the Strait of Hormuz would get worse, according to The Wall Street Journal, while the Trump administration is working to address high oil prices.
Those prices are driving outperformance in energy stocks. The State Street Energy Select Sector SPDR ETF (XLE), which holds the dozens of energy stocks in the broad market index, is up more than 25% year-to-date. Bank of America’s strategists now advise buying the S&P Energy sector—not the S&P 500 at large—because, they say, the group looks undervalued compared with the index as a whole.
The energy sector appears to be the place to be, with the group recently outperforming all other segments of the S&P 500 and market experts increasingly touting the thematic play amid warring in the Middle East.
Meanwhile, the bank’s commodity research team recently raised its target on Brent crude prices. The market appears to have priced in a “de-escalation, but not higher for longer oil,” BofA’s equity team, including Savita Subramanian and Jill Carey Hall said in a research report on Monday.
A back-of-the-envelope analysis comparing the price of West Texas Intermediate, the U.S. oil benchmark, to the S&P 500 shows that the broad market index is still more expensive than crude in spite of the latter’s recent runup, according to the bank’s research. Through that lens, according to the bank, the S&P 500 looks more expensive than at any other point in time going back to the 1960s, except for during Covid and the Tech Bubble.
The bank’s commodity research team on Monday raised its expectations for Brent crude to $77.50 per barrel from $61. The forecast is based on the firm’s vision of two “equally likely paths”—that there is a speedy resolution, where oil flows normalize by next month, and a conflict that goes into the second quarter.
The updated outlook on crude drove price targets for exploration and production companies the bank’s analysts cover higher by 17%. Brent recently traded at above $100 per barrel, backing off a bit from recent highs.
“Should the conflict extend into the second half of the year, the team sees Brent averaging an eye-watering $130/bbl,” BofA’s Kalei Akamine and his team said. “This path however is considered unlikely.”
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