Don’t Expect a Recession? Buy Energy Stocks.

The Marathon Petroleum Galveston Bay Refinery in Texas City, Texas.


Mark Felix/Bloomberg

With recession fears growing, and the stock market looking shaky, some analysts are increasingly bullish on energy and commodities, arguing that they’ve been unfairly punished.

In the past week, Goldman Sachs and J.P. Morgan have advised investors to turn back to energy as the rest of the market falters. There’s an important caveat to the recommendations, though. Both banks think fears of a global recession are overblown, so demand for commodities is likely to stay relatively strong. 

“In our view, commodities are pricing a recession more so than any other asset class,” wrote Goldman analyst Sabine Schels. “Pitted against that, our economists view the risk of a recession outside Europe in the next 12 months as relatively low. Macro data points to a deceleration but no contraction as weakness in manufacturing is contrasted with a still-strong services sector, partly on a travel boom.” Goldman thinks petroleum products look particularly cheap at current levels given global shortages, though it’s also bullish on other commodities such as wheat.

J.P. Morgan’s Dubravko Lakos-Bujas wrote that analysts at the bank see a “still low risk of global recession [over the] next 12 months.” 

Lakos-Bujas notes that energy stocks are still the cheapest sector in the market on both price-to-earnings and price-to-book ratios despite having risen 35% this year “with strengthening case[s] for rapid earnings growth and multiple re-rating.”

“For a sector that is a direct input into every segment of the economy and a natural hedge against geopolitics and inflation, in our view energy’s earnings stream is worth more than current price-to-earnings ratio of 9.5 times,” he wrote.

Goldman forecasts a particularly high oil price. The bank expects Brent crude to trade at $125 per barrel next year, more than many other banks. Brent is currently trading around $100 per barrel. To play it, the analysts “recommend an overweight position in the



S&P GSCI energy index

where we have a total return forecast of over 50% on a 12 months basis.”

Write to Avi Salzman at avi.salzman@barrons.com

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