Goldman recommends energy stocks to ride oil gain, hedge inflation risk

Published Mon, Jan 31 20229:22 AM ESTUpdated Mon, Jan 31 20229:45 AM EST

Energy is the top-performing S & P 500 group this year after posting record gains in 2021, and Goldman Sachs believes there's more upside ahead for the group. With inflation rising and oil prices at the highest in more than seven years, the firm said investors should boost their allocation to energy stocks. "Energy stocks also represent a potential hedge against risks from upside inflation surprises and geopolitical conflict," the firm's strategists led by David Kostin wrote in a note to clients. The call follows Goldman upgrading the energy sector to an overweight rating on Thursday, while lowering financials to neutral. The firm believes Brent crude , the international oil benchmark, will trade at $100 per barrel by the end of the year, which will drive energy stocks higher. The contract was trading at $91.17 per barrel Monday, after closing above $90 on Friday for the first time since October 2014. West Texas Intermediate crude futures , the U.S. oil benchmark, stood at $87.53 on Monday. Both contracts are coming off a sixth straight week of gains as oil surges back from its pandemic-era lows in April 2020. The energy sector has followed oil prices higher. The group is up 18.45% for the year through Friday's close, and is the only sector in the green for the year. The S & P 500 , by comparison, is down 7% for 2022. Goldman forecasts companies in the energy sector posting 2022 earnings growth of 84%, significantly above the consensus estimate of 37%. The firm also said the sector looks attractive from a valuation standpoint. "Energy valuations are extremely attractive relative to the S & P 500 index and should re-rate as earnings grow this year," Goldman said. "Now, energy has the lowest relative P/E multiple among the S & P 500 sectors and trades at the largest discount to its historical average." Additionally, the sector remains under owned, with hedge fund exposure near the lowest in a decade. Separately, Goldman's energy equity strategists released a note on Monday outlining some of the firm's top stock picks in the space. The firm believes the Energy Select Sector SPDR Fund will deliver a 15% total return over the next year, with some stocks outperforming the sector. Pioneer Natural Resources , Baker Hughes and Phillips 66 are among Goldman's top picks, with all three stocks on its conviction list. - CNBC's Michael Bloom contributed reporting.

Petroleum pump jacks are pictured in the Kern River oil field in Bakersfield, California.

Jonathan Alcorn | Reuters

Energy is the top-performing S&P 500 group this year after posting record gains in 2021, and Goldman Sachs believes there's more upside ahead for the group.

With inflation rising and oil prices at the highest in more than seven years, the firm said investors should boost their allocation to energy stocks.