Low valuations stacked with potential macro opportunities Is it a good opportunity to lay out the US stock energy sector at a low point?

Understood, financial commentator Lyn Alden Schwartzer, combining fundamental analysis with technical analysis from Zac Mannes and Garrett Patten, believes that the energy sector is worth watching in the current market for several reasons. Firstly, it is not favored; secondly, it is priced low and has profit potential; thirdly, there are signs of economic reacceleration; and fourthly, this sector can hedge the right-tail risks of investment portfolios. Reason 1) Not favored The energy industry had a major breakout in 2022, then had a mediocre performance in 2023, and in 2024, despite showing signs of vitality, it has basically exited the sight of most investors. Today's market focus is on artificial intelligence, with most investors wanting to invest in this area, and usually having good reasons to do so. Currently, several large-cap energy stocks like Exxon Mobil (XOM.US) are hitting new lows. In absolute terms, this proportion is low, so it is not enough to cause any form of mechanical short squeeze, but it helps to understand the direction of market sentiment. From a technical perspective, Zac Mannes believes the energy sector may have already formed its bottom, with a high likelihood of performing well next year. The performance of this industry in the next 6-12 months may depend mainly on market sentiment and human decisions, but from a trading perspective, this may be a good stop loss point. If the energy industry ETF firmly breaks below the recent low of $80, it may be a good time to stop loss and reassess the bullish viewpoint until the price trend turns positive again. Reason 2) Priced low and has profit potential Large-cap energy producers with long-term reserves usually have good fundamentals. Major companies like Exxon Mobil and Chevron (CVX.US) have a very strong AA- credit rating, indicating their balance sheets are very robust. They have locked in low rates for long-term corporate bonds, hold a large amount of cash equivalents, with rates rising as the Fed raises rates, putting them in a position of maturity mismatch opposite to typical banks. The P/E ratio of top-tier energy giants in the U.S. is below 12x. They have higher-than-average dividend yields, safe payout ratios, and decades of consecutive annual dividend growth. Investors willing to purchase Canadian or European energy giants can often find that their P/E ratios are well below 10x. Reason 3) Signs of economic reacceleration In the past two years, from many indicators, the U.S. economy has been slowing down. This means that while the economy is maintaining positive growth, the pace of growth has been slowing, with some industries even experiencing overall contractions. Aside from the well-known continued depression in the U.S. commercial real estate industry, the manufacturing sector has also been in a slump. However, early signs of stabilization and potential reacceleration have begun to emerge and should be closely monitored. Energy prices, like anything else, are based on supply and demand. Supply is determined by industry trends, OPEC+ decisions, and occasional supply disruptions, while demand is primarily driven by the global economic situation, especially indicators related to rate of change. Recently, deindustrialization in Europe, weakness in U.S. manufacturing, and currency crises in several emerging markets have suppressed demand. If these trends begin to stabilize and reaccelerate, with the U.S. Manufacturing Purchasing Managers' Index (PMI) rising, China's fiscal stimulus and asset price support strengthening, the market may find itself very one-sided on low-energy positioning. Reason 4) Can avoid right-tail risks In the past forty years of structural disinflation and economic growth, the 60/40 investment portfolio has been the ideal choice for many investors. During periods of economic expansion, stocks perform well, while during economic contractions, bonds perform well. However, in periods of inflation that are not as common in history, this type of investment portfolio may not be very effective, with a long period where neither stocks nor bonds perform well. In such situations, energy and other commodities often stand out as strong performers. This is because during periods of disinflation, most risks are "left-tail" risks, where economic recessions and high debt levels severely drag down the economy. On the other hand, during inflationary periods, there are more "right-tail" risks, indicating the economy may overheat sharply, leading to input costs and interest rates higher than expected. When considering how stocks may weaken in the next one or two years and wanting to guard against such risks, several main scenarios can be considered. The first scenario comes from the left tail, where the Fed's current hawkish attitude and the weakness in the commercial real estate industry may drag down the economy, leading to a weak labor market, and potentially triggering an economic recession. Holding a significant amount of cash equivalents (BIL) or U.S. dollar exposure (UUP) can hedge against this scenario. The second scenario comes from the right tail, indicating that persistent fiscal deficits may keep the economy hotter than expected, energy prices and wage prices may tilt upward, and the Fed may maintain higher rates for a longer period ("higher for longer"). Ironically, if the Fed continues its "higher for longer" monetary policy, it will lead to increased public interest expenses, exacerbating fiscal deficits. In addition, given the ongoing geopolitical tensions globally, the risk of supply interruptions is ever present, which could trigger risks from the right tail. Holding stocks of some energy producers can mitigate some of these risks. Overall, from a value investing perspective, companies in the energy sector not only have strong fundamentals but can also be seen as a proactive vehicle to guard against the occurrence of such right-tail risks. At current oil prices, energy giants have profit potential, allowing investors to hold these companies, but if energy prices rise significantly and threaten other portfolio assets, they will also rise significantly.