Wall Street Splits on Market’s Best-Performing Sector

A powerful rally in energy stocks, fueled by rising geopolitical tensions, has pushed the sector well ahead of the broader market and ignited debate over how much longer the momentum can hold.

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Over the past three months, energy has emerged as the top-performing sector in the S&P 500 Index, moving in lockstep with higher oil prices. Crude has climbed as the Trump administration escalated pressure on Venezuela’s oil industry and signaled a willingness to intervene amid violent unrest in Iran, both of which have raised concerns about global supply stability.

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Walter Todd, chief investment officer at Greenwood Capital Associates, said his firm remains overweight energy stocks, viewing the sector as attractively positioned relative to other parts of the market. “At current levels, energy offers a compelling risk-reward profile,” Todd said, particularly when compared with sectors that have already posted outsized gains over the past year.

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Even after the recent surge, investor exposure to energy equities remains relatively muted. According to Deutsche Bank AG, positioning in the sector is still below its historical median, suggesting that skepticism has not fully faded.

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Hedge fund activity reinforces that view: data from Goldman Sachs Group Inc.’s prime brokerage show that net selling by hedge funds in energy stocks ranked among the highest across S&P 500 sectors last week. Adding another layer of uncertainty, forecasts continue to point toward a meaningful oversupply of crude later this year.

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That said, geopolitical risks could continue to underpin the rally. Some investors see additional upside for US oil producers if American companies are encouraged to play a role in reviving Venezuela’s energy infrastructure, a goal repeatedly highlighted by President Donald Trump. At the same time, escalating tensions between the US and Iran have provided further support for crude prices.

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Speculative positioning reflects those concerns. On Monday, bullish call options on oil surged to record volumes as traders reacted to fears that protests in Iran could intensify and disrupt exports. The options activity highlighted how sensitive energy markets remain to developments in the Middle East.

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On the flip side, any easing of tensions could quickly reverse recent gains. Oil prices pulled back sharply on Thursday after the US signaled it would delay any direct military action against Iran. West Texas Intermediate crude posted its largest one-day decline since June, and the S&P 500 Energy Index fell 0.9% in response.

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“There’s still significant groundwork required before US companies could meaningfully operate in Venezuela,” said Rebecca Babin, senior energy trader at CIBC Private Wealth Group. “Any involvement would likely unfold gradually rather than all at once.” Babin also emphasized the importance of capital discipline, noting that investments in Venezuela could come at the expense of other projects instead of adding incremental growth.

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Historical patterns suggest geopolitical shifts in oil-producing nations can have lasting effects on prices. Research from JPMorgan Chase & Co. shows that since 1979, eight major regime-change events tied to oil producers have led to average crude price increases of around 30%, with some rallies peaking as high as 76%. In many cases, those shocks left a long-term imprint on the energy market.

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Against that backdrop, several major financial institutions have grown more optimistic about oil’s outlook. Citigroup Inc. recently lifted its near-term base-case forecast for Brent crude to $70 a barrel, pointing to a growing geopolitical risk premium tied to Iran and persistent export disruptions in countries including Libya and Algeria.

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More extreme scenarios have also been outlined. NEF estimates that if Iranian oil exports were completely halted from February through the end of the year, Brent prices could average as high as $91 a barrel in late 2026. While the firm views that outcome as unlikely, it considers it a plausible risk given the fragile geopolitical environment.

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For investors, the energy sector’s recent strength reflects a complex mix of geopolitical uncertainty, constrained supply risks, and cautious positioning. Whether the rally has further room to run may ultimately depend on how global tensions evolve and whether oil markets continue to price in the possibility of more severe disruptions ahead.

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