Oil and gas stocks specifically, and the U.S. energy sector in general, are likely in a market bubble that’s vulnerable to popping.
The chart above provides the specifics, based on U.S. data back to 1926. Whenever an industry or sector outperformed the broad market by at least 100 basis, or percentage, points over a two-year period, there was a 53% chance it would drop by at least 40% over the subsequent two years. When the trailing two-year outperformance was at least 150 basis points , those odds grew to 80%.
Do strong fundamentals apply? Energy sector bulls might object that the energy sector is in a far different place than the assets that were the subject of those prior columns. The sector’s current valuation appears quite attractive, with P/E ratios well-below the overall U.S. stock market. Don’t short energy stocks It’s important to stress that vulnerability to a crash doesn’t automatically make energy stocks attractive short-sale candidates. Even though prices of these stocks are likely at some point in the next two years to be significantly lower, there’s no assurance that their declines will begin from current prices.