Is XLE the Right Fit for Your Portfolio Before Summer?
Key Points
The Iran war led to a surge in energy stock prices. As tensions have cooled, share prices have stagnated.
Earnings growth for the sector has been strong in 2026, but it's expected to turn negative in 2027.
With downward pressures in earnings and likely lower oil prices once the Iran war comes to a resolution, energy stocks don't look like a buy right now.
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Tech stocks are getting all the attention on Wall Street right now, but the best-performing sector year to date is still energy. The State Street Energy Select Sector SPDR ETF (NYSEMKT: XLE) is up 32% so far in 2026, which easily tops the S&P 500's (SNPINDEX: ^GSPC) 8.8% return and the 23% return of the State Street Technology Select Sector SPDR ETF (NYSEMKT: XLK).
But all of those gains came during the first quarter of the year. So far in Q2, the XLE ETF is down about 2%, making it the second-worst-performing sector, behind only utilities.
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The narrative right now is almost entirely around the Iran war. As tensions escalate and oil prices rise, energy stocks tend to rise as well and vice versa. That's an environment that can create a lot of volatility with little sustainable upside to show for it.
As we head into summer with the timeline for an Iran war resolution still unknown, is the State Street Energy Select Sector SPDR ETF even worth considering?
Image source: Getty Images.
The case for investing in XLE is still largely geopolitical
Oil prices have been whipsawing in 2026, ranging from about $90 a barrel for Brent crude to $120. The biggest catalyst for this, of course, is the discourse emerging from Washington regarding the conflict.
It's difficult to say what the status of the war is at any given moment. We've seen ceasefire agreements generally fail to be honored. The Strait of Hormuz is still effectively blocked. The tone of rhetoric tends to shift from antagonistic to conciliatory quite frequently.
In general, that means no one really knows what to expect. If the conflict eventually gets resolved, we're likely to see oil prices decline again. As that happens, energy company share prices are likely to fall as well since margins would be shrinking.
From a fundamental standpoint, S&P 500 energy sector earnings are forecast to climb 57% in calendar year 2026, so much of the share price appreciation has been justified. However, earnings are expected to shrink by 5% in 2027. Valuations are already elevated, and share prices could get punished if earnings growth trends are negative. With the geopolitical headwind of lower energy prices also in play, risk/reward appears tilted to the downside.
XLE: Performance and key metrics
| Metric | XLE |
|---|---|
| Expense ratio | 0.08% |
| Assets under management | $42.4 billion |
| 1-year return | 41.3% |
| No. of holdings | 21 |
| Top holdings | ExxonMobil (23%), Chevron (17%), ConocoPhillips (7%) |
Source: State Street.
The biggest risk of the State Street Energy Select Sector SPDR ETF might be its concentration. Nearly half of the portfolio is invested in just three stocks -- ExxonMobil, Chevron, and ConocoPhillips. Investing in the energy sector is risky as it already stands. Banking on the good fortune of just a few companies to make it happen is even riskier.
Overall, I'm not a fan of energy stocks right now. Both the geopolitical and fundamental environments suggest downside pressures ahead. Plus, the current back-and-forth in Washington just creates volatility without meaningful returns.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends ConocoPhillips. The Motley Fool has a disclosure policy.
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