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Will Oil and Energy Stocks Dominate the Market in 2018?

Up until the last month or so, technology stocks dominated Wall Street in 2017. But just as the New Year appeared on the horizon, big investors started to cash out and shift their money elsewhere. The advent of volatility in the tech sector inspired others to rethink their strategies too, and now—just a few days before 2018—many are left wondering which sector will emerge as the top choice in the coming months.

Despite December’s volatility, it is safe to say that 2017 was the year of the tech stock. According to our Zacks Sector Rank data, the “Computers and Technology” group has gained over 29% year-to-date, outpacing the respectable 22% gain of the S&P 500.

And unlike tech’s other notable rally, that of the “dot-com” era, this year’s tech surge has been fueled by solid top and bottom line growth. In fact, the average P/E ratio of our tech group currently sits at 23.65, which compares favorably to the dot-com era’s average that routinely soared into the 200s (also read: One Big Reason Why Tech Stocks Are Not In the 'Dot-Com Bubble').

But tech stocks have dipped over the last month, implying that Wall Street is taking its profits and moving money into different sectors ahead of the New Year. Fortunately, the Zacks Sector Rank is already indicating which sector is heading into 2018 with the strongest prospects.

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Indeed, in what may come as a surprise to some, our “Oils and Energy” group currently sits atop the list of 16 different sectors covered here at Zacks. The Zacks Sector Rank is calculated by taking the average Zacks Rank of each individual stock that makes up these groups, so investors can be assured that “Oils and Energy” is home to a plethora of strong picks right now.

There is plenty of information to dig into here, but first let us take a look at the recent price performance in the energy sector compared to that of the broader market:

As we can see, the energy sector has really started to pick up steam over the past month, indicating that it has attracted some of the investors looking to rebalance at the end of the year.

Meanwhile, we are looking at an encouraging earnings picture throughout the sector. The average projected earnings growth in our “Oils and Energy” group currently sits at 51.52%. While this year-over-year comparison is lifted by soft 2017 results, it is a positive trend to see such a dramatic and widespread rebound.

On the oil side of things, production-focused firms are benefitting from rising crude prices. Panic struck the international markets during the summer as oil plummeted below $45 per barrel. But since then, OPEC has doubled down on its commitment to reign in production, and crude prices have climbed about 35% over the last six months.

Elsewhere, clean energy companies are benefitting from strong international demand. While the United States’ decision to withdraw from the Paris Climate Accords drew major headlines this year, we have actually seen a renewed commitment to invest in clean energy from major governments and corporations alike. Certain industries—like solar—will need to find profitability as tax credits dry up, but there is still plenty to be bullish about in green energy.

On the topic of taxes, energy companies of all shapes and sizes might stand to benefit from the GOP’s tax reform effort. Of course, the lowering of the corporate tax credit will boost bottom lines across the board. But the bill is also supposed to give consumers more money to spend in the economy, which could cause a rise in demand for products like gasoline.

Analysts consider all of these factors when issuing earnings estimates and earnings estimate revisions, so it is important to keep an eye on these trends when considering the strength of the energy sector right now. As mentioned, “Oils and Energy” sits at the top of our Zacks Sector Rank right now. We have seen 145 positive revisions spread throughout the 336 individual companies included in this group.

Valuation wise, the group is sporting an average P/E of 22.50, coming in just above the S&P’s average of 20.23. But we know that profits can be volatile in this sector given specific market conditions, so it is also a good idea to look at the revenue picture. The average P/S of the “Oils and Energy” group is sitting at 1.68, which is definitely more attractive.

To date, the energy sector has gained a measly 1.84% in 2017, and that includes a strong surge over the past month. Based on the latest momentum and earnings outlook, it is hard to imagine this sluggishness continuing into the New Year, especially considering the market-wide desire to explore non-tech options have started to see.

Want more stock market analysis from this author? Make sure to follow @Ryan_McQueeney on Twitter!

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