1 overlooked sector that’s helping the S&P 500 hit record highs

The S&P500 is having a strong year. He recently closed at another all-time high for the 24th time it was closed to a record level in 2024. The broad market index increased by over 10% per year and over 25% in the last 12 months.

Several catalysts helped propel S&P 500 Indexes this year’s results were record-breaking. One factor that many investors may have overlooked is effect energy reserves they are on the index. Energy stocks listed on the S&P 500 have surprisingly outperformed the broader market index this year, as measured by rates of return. Energy Select Sector SPDR ETF.

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Here’s a look at the factors driving the sector’s returns and some of the S&P 500’s unsung heroes.

Analysis of what fuels energy supplies this year

In most cases, energy stocks rise and fall with oil and gas prices. With energy stocks rising in 2024, it won’t be surprising to hear that oil prices will be higher this year. Brent, the global benchmark price for crude oil, rose about 7% to more than $80 a barrel. Meanwhile, WTI, the main benchmark for U.S. oil prices, rose almost 10% to just under $80 a barrel. Several factors contributed to the increase in oil prices, including: OPEC further supporting the oil market by suspending supplies and concerns about the ongoing conflict in the Middle East.

Higher oil prices allow producers to make more money, which increases their value. For example, the oil giant ExxonMobil (XOM 0.61%) generated nearly $14.7 billion in operating cash flow in the first quarter, an increase of $1 billion over the fourth quarter. The oil giant delivered an even greater increase in free cash flow (from almost $8 billion to over $10 billion). Exxon returned about $6.8 billion of that money to shareholders in the form of dividends ($3.8 billion) and share repurchases ($3 billion), with the rest accumulating on its balance sheet ($33.3 billion at the end of the first quarter). . Exxon’s strong performance has helped Exxon’s share price rise nearly 18% this year.

Three best-performing energy companies in 2024

While Exxon has good year, other energy stocks brought even better profits. The top three companies in the S&P 500 index are Resources Trade shows (TRGP 1.07%), Diamondback energy (CANINE 1.29%)AND Valero (WLO 0.85%).

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Targa Resources is a little-known company pipeline company. It promises a record year in 2023. It achieved record adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), which grew 22% last year, driven by record volumes. The company expects 2024 to be a solid year (adjusted EBITDA growth of 8%) before growth accelerates again in 2025 with the launch of several expansion projects.

These projects should provide a significant increase in free cash flow next year. This gives Targa the confidence to return more money to shareholders (it increased its dividend by 50% earlier this year and is buying back shares at a record pace). While Targi’s stock has already surged this year, its strong growth profile could cause it to do so give him fuel to continue growing.

Oil and gas producer Diamondback Energy has benefited from higher oil prices this year. In the first quarter, it generated more than $1.3 billion in operating cash and nearly $800 million in free cash flow. About half came back With its free cash to investors in the form of dividends and share buybacks. The company should generate more cash in the future, even if oil prices don’t continue to rise, driven by the upcoming acquisition of Endeavor Energy Resources. This extremely favorable transaction will make it a leading pure entertainment producer in the prolific Permian Basin.

Refining giant Valero rounds out the top three. The company reported good results for the first quarter, even though it had to go through a difficult period of planned renovation works, which affected its ability to refine oil. Once maintenance projects are completed, Valero’s earnings could be even higher in the coming quarters. Meanwhile, Valero continues to make excellent progress in its expansion into renewable fuels. Renewable diesel production is increasing as production capacity increases. Additionally, the company expects to complete a sustainable jet fuel project later this year, which will put it even better positioned to further increase profits amid the global energy transition to low-carbon fuels.

He has calm energy strong year

Energy stocks are benefiting from rising oil production and rising demand. This enables companies to generate more cash to fund expansion projects and return money to shareholders. The world is slowly moving away from fossil fuels, but it will need oil and gas for decades come. For this reason, investors should not completely ignore energy stocks as they have the potential to generate high-octane profits.

Matt DiLallo has no position in any of the companies mentioned. The Motley Fool recommends Targa Resources. The Motley Fool has a disclosure policy.