History Says Energy Led All Sectors in the Last Bear Market. Here's What's Different Now.

Energy stocks were the clear winners during the 2022 bear market. The S&P 500 energy stocks delivered a total return of 65.7%, while the broader S&P 500 (SNPINDEX: ^GSPC) lost 18.1%, including dividends.

Energy stocks are leading again in 2026, but without a broader bear market. S&P 500 energy stocks have gained 42% so far this year, compared with a 12% gain for the broader S&P 500 index, excluding dividends.

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In 2022, rising oil prices boosted energy companies' earnings, while inflation and aggressive interest rate hikes weighed on the broader market. The 2026 rally has been supported by oil supply disruptions in the Middle East, with unusually high refining margins. But a recovery in global oil supplies could put pressure on energy profits and stock valuations.

Why energy's 2022 rally may not repeat

ExxonMobil (NYSE: XOM) reported earnings of $55.7 billion in 2022, compared with $23 billion in 2021. Chevron's (NYSE: CVX) earnings also more than doubled to $35.5 billion in 2022. Both companies returned billions to shareholders through dividends and share repurchases.

However, April 2025 offered a different picture. President Donald Trump's tariff announcements triggered a sharp market sell-off. The S&P 500 fell 21.3% from its February 2025 peak during intraday trading, but did not officially enter a bear market based on closing prices. But S&P 500 energy stocks fell 13.7% in April 2025, making energy the worst-performing sector.

Rising concerns about slowing economic growth and weaker oil demand negatively impacted energy stocks in April 2025. This also demonstrated that energy stocks do not outperform during every market downturn.

Global oil supplies may start rising

The U.S. Energy Information Administration (EIA) estimated that 4.8 million barrels per day of Middle East crude oil production remained shut down in September 2026, compared with a peak of 10.9 million barrels per day in May. But damaged pipelines and risks to oil tankers continued to affect shipments.

However, EIA expects global liquid-fuels production to fall short of consumption by around 1.3 million barrels per day in 2026. The production is then projected to exceed consumption by approximately 5 million barrels per day in 2027. This represents a potential swing of nearly 6.3 million barrels per day in the global liquid-fuel supply-demand balance.

This forecast assumes that supply routes will reopen and production will also recover. If that happens, rising inventories could reduce oil prices even without a recession in the U.S. The EIA forecasts annual average Brent to decline from $96 per barrel in 2026 to $84 per barrel in 2027. However, renewed geopolitical tensions or slower infrastructure repairs could delay the recovery.

Oil markets are already responding to expectations of easing supply disruptions. Brent crude prices dropped below $100 this week. Hopes of peace agreements involving Iran and Ukraine contributed to the decline, even though the underlying supply disruptions had not been fully resolved.

Why energy companies' record profits may not last

In the third quarter of 2026, ExxonMobil's Energy Products segment, which includes refining and fuels, reported earnings close to $7.2 billion. Chevron's downstream business earnings also more than quadrupled to $4.9 billion in the third quarter of 2026.

However, these strong downstream earnings may not persist. Disruptions to refineries in the Middle East and Russia have constrained gasoline and diesel supplies. This has pushed their selling prices higher relative to crude oil. However, as damaged refineries resume production and fuel supplies recover, the difference between refined product and crude oil prices could narrow.

Lower crude prices could also hurt earnings from oil production. ExxonMobil estimates that every $1 per barrel change in Brent crude prices would affect its annual upstream after-tax earnings by approximately $700 million, based on expected 2026 operations. Applying this sensitivity to the EIA's projected $12-per-barrel decline in annual average Brent crude oil prices suggests a potential $8.4 billion annual headwind for Exxon's upstream earnings. This estimate assumes that Exxon's production volumes, costs, and other operating conditions remain largely unchanged.

Are energy stocks worth buying now?

According to FactSet Research Systems' Oct. 30 report, S&P 500 energy stocks traded at 13.2 times expected earnings over the next 12 months, significantly lower than S&P 500's forward 12-month price-to-earnings ratio of 18.7x. However, the valuation of S&P 500 energy stocks was above its own five-year average forward 12-month PE of 12.6.

According to analyst estimates compiled by FactSet, S&P 500 energy sector earnings are expected to decline 7.8% in 2027, compared with projected earnings growth of 16.3% for the broader S&P 500. This suggests that energy's lower valuation relative to the broader market may reflect expectations of weaker future earnings, rather than necessarily making the sector a bargain.

I would avoid aggressively buying energy stocks after their substantial gains in 2026. A recovery in oil supplies could weaken earnings, even if the broader stock market remains strong.

Manali Pradhan, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron and FactSet Research Systems. The Motley Fool has a disclosure policy.