You are about to witness a pivoting moment in the stock market, driven by similar changes in the underlying economy today. People tend to fall into a sort of continuation fallacy, where what has been happening in the past could continue into the future, which is far from reality. Today, stocks may have to dance to a different tune soon.
Most trends are driven by one main component, and that is money. Cheap money moves markets in one way while expensive money pushes it the other direction, so, is money about to become expensive or cheap? According to the FED, this year it could potentially get cheaper after their proposed rate cuts, here's what that will do.
Wall Street has adopted a new view as to where the economy could be headed after or during these cuts, and the buck stops in energy stocks as a potential winner for 2024. Names like Baker Hughes (NASDAQ: BKR) are attracting all the fuzz form analysts and broader markets, dig in to find out why.
Not your typical swing
Have you noticed how oil prices have remained low for a while now? The United States has been importing most of its oil demand after the manufacturing sector posted contractions for a year, but that could change soon. Oil futures are now in a condition known as 'contango', which is the first bullish sign for oil since 2021.
In their 2024 macro outlook report, analysts at The Goldman Sachs Group (NYSE: GS) made sure to highlight their opinion on a breakout of the manufacturing space, sponsored by the coming FED rate cuts.
You see, a weaker dollar (as a result of lower rates) makes American exports more attractive to foreign nations; but there needs to be inventory to export right? That's where manufacturing comes in. But where does that put oil?
Producers will need oil to accommodate the increased manufacturing demand in the nation. Oil revolves around machinery and other factory necessities to run, so this newfound demand could push oil prices higher. How high? The same Goldman analysts have an opinion, too.
How does a range of $70 to $100 a barrel sound? It seems that the Energy Select Sector SPDR Fund (NYSEARCA: XLE) has found its opportunity to catch up to the S&P 500 after underperforming it by as much as 33.2% over the past twelve months.
This is where the birth of the new cycle brings its new promise, but the sector is broad, and you may want to know where markets and investors are concentrating their gifts. Successful stock picking could enable you to amplify your returns compared to the overall sector ETF.
Best pick
Knowing the market’s language can help you translate what it is trying to tell you. Today, price action and the forward price-to-earnings ratio will be crucial to figuring out what the market thinks of certain stocks in this space, knowing what you know now, the odds can be put in your favor.
Taking the large capitalization field services stocks in the oil sector, you can get a clearer picture on an apples-to-apples comparison. A particular comparison between Baker Hughes stock and competitors like Halliburton (NYSE: HAL) can point you in the right direction.
Baker stock trades today at 82.0% of its 52-week high prices, which would show much more optimistic price action compared to Halliburton, which can be found trading at 76.0% of its 52-week highs. According to Wall Street’s definition, this puts the stock in a bear market (20% or below highs).
So, why is Baker being rewarded with better price action here? For starters, analysts expect earnings per share growth of 29.9% in this name, more than double its competitor. Halliburton stock only commanded 12.4% potential EPS growth in the next twelve months.
There lies the justification for the market’s willingness to overpay for Baker stock. With a 15.0x forward P/E ratio, this stock trades at a premium of 56.7% to its competitor. As the saying goes “it must be expensive for a reason.” Some of the reasons you already know today.
You can worry about the rising oil prices that could be here before you know it, and by all means prepare to pay a bit more at the gas pump; or, you can make up for the higher gas bill by considering a potential buy in Baker stock to ride the newest cycle brought to you by the boys at the FED.
