Major Changes in the US Stock Market: Exxon Mobil "Rises", Energy Outperforms Technology

A 100,000-word article Tesla must win

Non-farm employment unexpectedly achieved the largest monthly increase in nearly a year, dampening expectations of interest rate cuts. Oil prices continued to hit a new high for over five months with the help of geopolitical tensions, while the previously steadily rising US stock market experienced severe volatility this week.

Tech giants continued to show mixed performance, with Apple, Nvidia, and Tesla falling by 1.1%, 2.5%, and 6.2% respectively, while Meta surged by 8.6% leading the pack. Amazon rose by 2.6%, and Microsoft and Alphabet rose by about 1.1%.

As the "Seven Giants" downgrade to "Four Giants," energy stocks are outperforming tech stocks.

So far this year, the performance of the S&P 500 energy sector has surpassed the tech sector. If dividend income is included, it even outperformed the communication services sector where Meta and Alphabet are located on Friday. In terms of expected P/E ratios, the valuation of the energy sector has risen to its highest level since the Fed began raising interest rates in March 2022.

After experiencing the volatility this week, the list of winners should include a long-standing name - ExxonMobil.

As the largest component stock of the S&P 500 energy sector, ExxonMobil has risen by nearly 5% this week and hit a historical high, with a cumulative increase of 21% this year, ranking fourth among the seven giants, just behind Nvidia and Meta, on par with Amazon.

Behind ExxonMobil's popularity in the capital market are two main reasons: first, due to the stronger-than-expected global economic performance, there is strong demand for oil; second, supply chain blockages caused by geopolitical crises such as the Russia-Ukraine conflict and conflicts in the Middle East.

At the same time, there is a major shift in market logic. Recently, investors have been focusing on the decline in US bond yields caused by falling inflation, which has been beneficial for growth stocks mainly in the tech sector stimulated by the concept of artificial intelligence. Now, while the market has not forgotten about inflation, it is more focused on the positive factor of economic growth exceeding expectations Some predict that stubborn inflation will prompt central banks around the world to postpone interest rate cuts, ultimately leading to an economic slowdown. Currently, oil stocks provide a new way to bet on economic growth, even if geopolitical tensions end the growth narrative, they can still offer investors some protection.

Market Focus Shifts from Inflation Decline to Economic Growth

The market has always seized on any signal of reigniting inflation, so good economic news is seen as bad news for the market, and vice versa.

Especially as we entered 2024, supported by Fed Chairman Powell's signal of rate cuts, US bond yields fell sharply, and US stocks surged. By early January this year, investors even expected the Fed to cut interest rates as many as six times throughout the year, with each rate cut expectation serving as a booster for the US stock market.

Both the market and the Fed believe that inflation is steadily returning to the Fed's 2% target.

Subsequently, the market focus shifted to economic fundamentals. With economic growth better than expected, the dot plot released in March predicted only three rate cuts for the year, falling short of the market's previous expectations. However, investors were not worried, but instead cheered the rate cuts as evidence of a solid economy.

Thus, the shift in perception from good economic news being bearish to good economic news being bullish was completed.

However, economic growth also has limitations, with the core being oil prices. When the economy fully recovers, oil prices rise, leading to increased consumer spending at gas stations. If demand is too strong, soaring oil prices mean damage to other areas of the economy.

This is also reflected in other commodities, albeit to a lesser extent. The latest PMI data shows a significant increase in raw material prices in March, with companies raising prices to nearly a year-high.

Prices of commodities sensitive to inflation such as oil, gasoline, copper, and gold have recently risen (gold hit a new high on Friday), which may indicate that economic growth will trigger a new round of inflation, reigniting investors' concerns about price increases.

Strong economic performance also challenges financial limits, reflected in interest rate trends, as seen in the US March Manufacturing PMI hitting a near two-year high, pushing the 10-year US Treasury yield sharply higher this week, approaching 4.4% at one point. On Friday, stimulated by the significantly better-than-expected non-farm payroll data, the benchmark yield once again approached this level.

Will Market Logic Change Again?

It is worth noting that market logic may change again in the future.

Some analysts suggest that the surge in US bond yields on Tuesday is once again seen as a negative factor for US stocks. In the past few months, the market generally viewed rising yields as a sign of a strong economy, hence positive news for the stock market.

Shamik Dhar, Chief Economist at BNY Mellon Investment Management, believes that if the market shifts from focusing on the reduction in the number of Fed rate cuts to preparing for actual rate hikes, it will be a major turning point in market logic. "You will see a significant logic change at that time." He said, "The market favors relatively simple logic."

Investors always like to extract a concise narrative from complex influencing factors. Once the market reaches a consensus on "what is driving the market," this narrative may self-fulfill until a new narrative emerges.

Geopolitical frequent occurrences, oil stocks seize opportunities

So, can oil giant Exxon Mobil be compared to tech giants?

The difference between oil giants and tech giants is that oil producers not only benefit from growth-driven inflation cycles but also profit from supply-side tensions.

Recent global geopolitical conflicts have occurred frequently, such as Ukraine's attacks on Russian oil facilities, armed attacks by Yemeni forces in the Red Sea, and the risk of Israel-Iran conflicts, all intensifying global concerns about oil supply and providing support for oil prices.

According to Goldman Sachs' report, crude oil production in the Lower 48 region of the United States is nearly 400,000 barrels per day lower than the peak in December last year, and Russia's refining capacity has decreased due to continuous drone attacks since January, with its liquid oil production forecasted to decline to 10.2 million barrels per day.

Goldman Sachs believes that disappointing crude oil production indicated by U.S. pipelines, coupled with the decline in Russian crude oil production and the continued rising risk of more attacks on Russian oil infrastructure, have exacerbated market concerns about supply tightness.

Goldman Sachs predicts a 350,000 barrels per day supply-demand gap in the second quarter. Despite upside risks, considering the uncertainties in U.S. and Russian supplies, as well as overestimation of time spreads and excessively speculative positions, oil price consolidation remains the base case scenario.

Analysis suggests that in the stage of economic growth driving inflation but not yet out of control, non-energy stocks, especially undervalued value stocks, should perform well. However, in the event of an oil supply shock, only oil stocks can enjoy the dividends, while other stocks will have to endure the pain of slowing growth, recession, or even stagflation