Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / Why Energy Stocks Are Getting Crushed While Everything Else Rallies
Transcript
- Lucas: So we are five days into a pretty broad rally — the S&P 500 up 2.5 percent, small caps up 4 percent, NASDAQ nearly 4 percent. But right in the middle of that, ExxonMobil is down 5 percent and Chevron is off 3.3 percent. That is a 7 to 8 percent divergence from the market in one week. Luna: That's striking. Energy is usually a momentum follower — when the broader market rallies, energy tends to tack along. So what's the story here? Lucas: The story is that the market is pricing in a recession, but only in certain pockets. Small caps, which are more domestically oriented, are rallying on hopes of rate cuts. Tech is rallying on AI enthusiasm. But energy is being hit by two forces: one, a genuine fear that global demand softens in the second half of 2026, and two, real supply-side pressure from OPEC plus. Luna: Right — and I think listeners might not realise how much the oil market has changed since early 2025. OPEC plus has been disciplined, but now they are signalling they will add barrels in the third quarter. That is a direct headwind for Exxon and Chevron. Lucas: Exactly. And look at the yield spread. Exxon's dividend yield is now about 3.9 percent. That's not bad, but it's not compensating for the risk of a 20 percent drawdown if oil drops another ten dollars. Meanwhile, utilities — which are also considered 'defensive' — have yields around 3.2 percent and have actually been flat to up during this energy selloff. So the market is saying: I'd rather own a regulated utility with stable cash flows than an oil major that's at the mercy of the next OPEC meeting. Luna: And that's where the recession-pricing idea gets interesting. Because if you believe a recession is coming, energy is one of the first sectors to get cut from portfolios. But if the recession doesn't materialise, you're leaving yield on the table by selling Exxon at these levels. Lucas: Right. And speaking of value — a couple of dollars a month from listeners is genuinely what keeps these conversations independent. If our money conversations have helped you think about a decision differently, you can support the show at buy me a coffee dot com slash fexingo. It makes a real difference, and it keeps us free of ad clutter. Luna: Absolutely. It's a small thing that adds up. And now, back to those energy yields — because I think a lot of income-focused investors are wondering whether to hold or rotate. Lucas: So let's talk about the rotation question. If you own Exxon or Chevron for income, the 3.9 percent yield is still attractive in a world where the ten-year Treasury is yielding around 4.1 percent. But the risk is that the dividend itself could be at risk if earnings collapse. Exxon's payout ratio is roughly 50 percent based on current earnings estimates. That's not alarming yet, but if oil drops to sixty dollars — and some analysts think it could — that payout ratio jumps to over 70 percent. That's when boards start getting nervous. Luna: So the buy the dip crowd might be early. What about Chevron? It's been underperforming Exxon this year, and the 3.3 percent drop this week is just the latest leg. Lucas: Chevron has its own issues. They've got the pending acquisition of Hess stuck in arbitration, which overhangs the stock. And their production growth profile is weaker than Exxon's, so they get hit harder on a demand slowdown. The market is basically pricing in a 10 percent probability of a deep recession, in my view, by hammering these stocks. Luna: Do you think there's a parallel with other commodity-linked stocks? I'm thinking about Pfizer — which we talked about a few episodes ago. It's down this week but only modestly, and it's also a yield play with its own demand risk. Lucas: Great comparison. Pfizer is a bit different because its revenue base is more diversified now — they've got the Seagen acquisition adding oncology, and their pipeline is broader than it was in 2023. But the principle is similar: when the market fears a slowdown, it punishes companies with cyclical exposure. Pfizer has some patent cliffs coming, but not the same direct commodity price risk. So its 1.8 percent gain this week actually makes sense — it's benefiting from the broad rally, not being singled out. Luna: So for an investor who already owns Exxon or Chevron, what's the move? Do you hold, trim, or swap into something like a utility ETF? Lucas: I think it depends on your time horizon and your conviction in the recession narrative. If you believe the soft landing scenario — where the Fed cuts rates later this year and the economy reaccelerates — then energy is actually cheap here. The forward price to earnings ratio on Exxon is about 12 times, which is below its five-year average. But if you're more worried about a downturn, then you should probably trim into any rally and move into something with less cyclicality. I personally am in the 'hold and collect the yield' camp, but I would not be adding aggressively here. Luna: That's a nuanced take. And I think for listeners who are building concentrated portfolios — which is the whole point of this show — this is a good example of why you can't just look at a stock's yield in isolation. You have to understand what's driving the sector. Lucas: One hundred percent. A concentrated portfolio should have high conviction names, and right now energy requires a very specific macro view. If you don't have that view, you're better off owning the broad market and letting the sector weights do the work. The S&P 500 already has about 4 percent in energy, which is enough to participate without taking on single-stock risk. Luna: So final take: energy is not broken, but it is out of favor. And the divergence we're seeing this week is a signal about what the market fears most right now — a demand shock, not a supply shock. Lucas: Exactly. And that's a useful lens for any investor. When you see a sector dramatically underperforming in a rising market, ask yourself: what is the market trying to tell me about that industry's future? In this case, it's saying we're not out of the woods on the global economy yet. And that might be the most important takeaway of all.