Since late February, when investors fell out of love with biotechnology and other high-flying stocks, the market's fuel has been oil. Energy names have been the best-performing sector in the S&P 500 since Feb. 25 when the selloff in high-growth stocks began. The sector will look to build on recent gains when bellwethers Exxon Mobil Corp, Chevron Corp and ConocoPhillips report results next week.
The rotation to value has limited the broader market's selloff. That could continue: Morgan Stanley said in a recent note that strong rotations to value names are usually followed by longer periods of value leadership.
Energy sector funds have attracted inflows in nine of the past 10 weeks; flows have averaged $488.9 million weekly over the last four weeks, the most since March 2011, according to Lipper, a Thomson Reuters company.
On a total return basis, energy is up more than 7 percent since Feb. 25, compared with a gain of just over 2 percent for the S&P 500 and a loss of 1.8 percent on healthcare, the worst-performing sector in that period.
"These big energy companies that pay dividends and have solid buyback programs are more defensive in nature as long as the price of the underlying commodity holds up," said Mike O'Rourke, chief market strategist at JonesTrading in Greenwich, Connecticut.
Both Exxon and Chevron rank among the top 10 dividend payers in terms of absolute dollars, according to S&P Dow Jones Indices. With a price-to-earnings ratio of 14.2, significantly below the S&P 500's 17.8, energy should continue to attract investors as the rotation to value continues.
"A lot of the major oil companies are entering the next phase of their life cycle, where there's more of an emphasis on profitability and cost control," said Faisel Kahn, senior oil equity analyst at Citi in New York. "We think that returns have a pretty good chance of growing from here."
Halliburton Co, the world's No.2 oilfield services provider, said earlier this week that their customers are stepping up spending to drill and complete wells as operating budgets swell. Schlumberger Ltd and Baker Hughes Inc also spoke of improved markets in North America.
According to the U.S. Federal Reserve, capacity utilization in the oil extraction sector currently sits at 99.2 percent of total capacity, far exceeding the average over the previous 40 years of about 92 percent. So far in this earnings period, 14 energy names have reported results, with 11 - or 79 percent - exceeding estimates, making energy No. 1 among sectors with more than 10 companies reporting.
"With investors generally underweight Big Oils, there are early signs that significant negative consensus EPS revisions are likely leveling off," said Asit Sen, an analyst at Cowen & Co, referring to earnings per share estimates in a note this week.