Published: Monday, November 18, 2024 · 1:51 PM | Updated: Monday, November 18, 2024 · 1:51 PM
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According to David Sekera, a top strategist at Morningstar, the energy sector deserves a place in every investment portfolio. In a recent interview, Sekera mentioned that the energy sector currently trades at a 5% discount to its fair value and is expected to perform well in a re-inflationary environment projected for the latter part of 2025.
Notable figures such as George Bull, Chairman of Sander Morris, and Aaron Dunn, Portfolio Manager of Morgan Stanley’s U.S. Value Fund, also favor the energy sector. This optimism largely stems from the expected policies of incoming President Donald Trump, who aims to combat inflation by reducing energy costs.
Within the energy sector, Sekera highlights stocks like ExxonMobil (XOM) and Devon Energy (DVN, Financial). Morningstar assigns a four-star rating to Devon Energy, indicating that its trading price is 22% below its fair value. ExxonMobil carries a three-star rating, with a price 12% below its fair value. Morningstar’s rating system ranges from one to five stars, where higher ratings suggest that stocks are undervalued.
Following Donald Trump’s presidential election victory, U.S. stocks initially hit record highs but have slightly declined since. Sekera believes that any further gains in the stock market will be limited in the short term. He suggests that the U.S. stock market is “perfectly priced” and will likely see limited upside until earnings catch up with valuations, which could take several quarters.
Currently, U.S. stocks are trading approximately 6% above their fair value. In this scenario, Morningstar maintains a “market equilibrium” stance on U.S. stocks, citing sufficient tailwinds to counteract headwinds. Sekera anticipates these headwinds to include inflation levels dropping below the Federal Reserve’s target of 2% and further interest rate cuts into 2025. Additionally, he forecasts long-term bond yields to average 3.6% in 2025, decreasing to 3.2% in 2026.
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