This Year’s Top Performing Sector Isn’t What You Think It Is

Without researching it, do you know which stock market sector is performing best this year?

If you guessed technology or communication services, given the surge in Nvidia and Meta shares, you’d be wrong like me. 

What then is the best performing sector of the year?

Energy. 

The energy sector has gained 15% so far this year, pushing the Energy Select Sector SPDR Fund (XLE) to its highest level since 2014. The gains come as demand has outstripped supply, largely a result of geopolitical turmoil that has created logistical challenges.

Oil's Price Rising

On Thursday, the price of Brent crude oil, a widely watched measure of energy prices, was topping $89 per barrel, its most expensive price since October, following OPEC production cuts and Middle East tensions. 

The S&P 500 energy sector is dominated by two companies, Exxon and Chevron, who together make up over 41% of XLE. 

Throw in ConocoPhillips and three stocks account for nearly half of the sector. 

Both Exxon and Conoco are near all-time highs. Chevron is lagging modestly as it attempts to complete a megamerger with the smaller oil company, Hess. 

A month ago, Exxon threw a wrench into the tie-up between its biggest rival and Hess when it sought to exercise a clause in the contract governing the operations of a massive oil project off the coast of Guyana.

That project, which is jointly operated by Exxon, CNOOC and Hess, composes the bulk of the latter’s value.

If Exxon successfully blocks the merger (most analysts don’t think it will be able to), then that might dent Chevron’s plans to grow its oil production. 

That’s what’s been weighing on the shares.

Meanwhile, tech is underperforming the broader market, with a 7.5% gain. About three-quarters of Nvidia’s red hot 82% rally has been offset by an 11% drop in shares of Apple.

Communication services is up 13.1%, the second-best performance among the S&P 500’s 11 sectors and ahead of the broader index’s 9.1% gain.