US energy stocks remain "cheap" after a surge: Continued high oil prices may lead to a valuation recovery.

Energy stocks are experiencing a strong rally that is rare in many years, and the return of oil prices to triple digits could further extend this trend.

Since 2026, the energy sector has risen by more than 43%, far outperforming other S&P 500 sectors. The State Street Energy Select Sector SPDR ETF, which tracks U.S. energy stocks, has significantly outperformed crude oil prices in recent months.

Brent crude oil broke through $100 a barrel on Wednesday, reaching its highest level since May. While the S&P 500 fell 0.5% that day, the energy sector bucked the trend and strengthened. Large energy stocks such as Exxon Mobil and Chevron received significant support.

However, from a valuation perspective, energy stocks have not become expensive despite the surge in share prices.

According to Bloomberg, the energy sector remains one of the lowest-valued sectors in the S&P 500. While its earnings growth has once again become one of the strongest in the index, Wall Street tends to view this round of earnings growth as temporary and therefore has not given energy stocks a higher valuation premium.

However, with persistently high oil prices, declining inventories, and shrinking spare supply capacity, analysts have begun to reassess this assessment.

With oil prices breaking $100, energy companies' profit forecasts may be revised upwards further.

The key to this energy stock rally is not just the psychological barrier of oil prices breaking through $100.

Brent crude oil's break above $100 reflects market concerns about the ongoing conflict in the Middle East and further disruptions to global supply. With declining inventories and reduced spare supply capacity, the oil market's buffer against supply shocks is shrinking.

For energy companies, sustained high oil prices mean higher upstream profits and cash flow. More importantly, if high oil prices persist longer than previously expected by the market, Wall Street analysts may further revise their earnings forecasts for energy companies in the coming quarters.

Even if the operating profit margin of the energy sector falls back to about 15% by the end of 2027, it will still be significantly higher than the level of about 9% before the outbreak of the Iran war.

Therefore, the market is currently trading not just "short-term profits from rising oil prices," but also the possibility that the improvement in energy companies' profit margins may be more sustained than previously expected.

Energy stocks may become a "safe haven" in a high oil price environment.

Another advantage of energy stocks is that they exhibit a significant divergence from the broader market performance.

On September 9, after Brent crude oil broke through $100, US stocks came under pressure, with the S&P 500 falling by about 0.5% and the Nasdaq falling by about 0.6%. Meanwhile, the energy sector bucked the trend and strengthened, with large energy stocks such as ExxonMobil and Chevron receiving support.

The reason is that high oil prices have drastically different effects on energy companies and other industries.

For energy companies, rising oil prices mean improved revenue and profits; but for the economy as a whole, rising energy prices will push up business costs and consumer spending, and reignite inflationary pressures.

After Brent crude oil prices broke through $100, the yield on the 10-year U.S. Treasury note rose to near its highest level since October 2023, as the market began to reassess the impact of rising energy prices on inflation and monetary policy.

This also gives energy stocks a certain degree of relative defensiveness: if rising oil prices eventually lead to increased inflation, higher bond yields, and a suppression of the overall stock market, energy companies may continue to benefit from high oil prices.

What the market really needs to focus on is "how long can high oil prices last?"

Of course, the strong performance of energy stocks also faces a key question: Is the current high oil price a short-term geopolitical premium or a new round of sustained supply shock?

If the situation in the Middle East eases rapidly and global oil supply recovers, the decline in oil prices will again lower the profit expectations of energy companies; however, if the conflict continues, shipping in the Strait of Hormuz is more severely affected, and inventories continue to decline, then the energy profit recovery currently regarded as "temporary" by the market may last longer.

Therefore, for energy stocks, what really matters is not whether Brent crude oil reaches the $100 mark, but whether the $100 oil price can be sustained and whether corporate profits can be revised upwards in line with oil prices.

After energy stocks have already shown a strong performance rarely seen in many years, if oil prices continue to be high, profit margins remain high, and valuations do not expand significantly, then the upward trend in the energy sector may not yet be over.

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