The year 2024 witnessed a robust performance in the S&P 500, achieving a total return of 23.3%, following a similarly strong 24.2% gain in 2023. This impressive growth, marked by 57 record closes, was primarily driven by the burgeoning artificial intelligence (AI) sector and the Federal Reserve’s strategic interest rate cuts, which stimulated market confidence and investment. While every sector within the index experienced positive growth, the overall market performance was heavily influenced by a select few high-performing sectors, with seven out of the eleven sectors lagging behind the benchmark’s overall gains. Despite this disparity, five sectors managed to achieve returns of 20% or more, demonstrating the concentrated nature of market growth.
The AI sector emerged as a dominant force in 2024, spearheading the market’s upward trajectory. Companies like Nvidia and Broadcom epitomized this trend, showcasing the transformative power of AI and registering staggering gains of 171% and 108% respectively. These remarkable performances not only propelled these companies to unprecedented heights but also underscored the growing investor enthusiasm and confidence in the long-term potential of AI technology. This sector’s performance significantly contributed to the overall market optimism and fueled investment in related industries.
While AI dominated the overall narrative, the consumer discretionary sector experienced a notable surge in the fourth quarter, delivering double-digit returns and highlighting the resilience of consumer spending. Conversely, the healthcare and materials sectors faced headwinds during the same period, experiencing double-digit losses that contrasted sharply with the broader market’s positive trajectory. This divergence in performance underscores the sector-specific dynamics and the influence of various factors beyond the overarching market trends.
The energy sector presented a more nuanced picture in 2024, registering a moderate total return of 5.6%. This relatively modest performance reflected a year of stable energy prices and a mixed performance across its subsectors. While midstream companies thrived, upstream producers and refiners grappled with challenges, creating a fragmented landscape within the sector. This variance in performance highlights the complex interplay of factors influencing the energy sector and the importance of understanding subsector-specific dynamics.
Within the energy sector, the midstream segment emerged as the clear winner, with an average total return of 20.8%, driven by robust fundamentals and consistent dividend growth. Companies like Targa Resources Corp. exemplified this success, achieving a remarkable return of 110.1%. These impressive results showcased the segment’s stability and its appeal to income-seeking investors, particularly in a year of relatively constrained energy prices. The midstream segment’s ability to generate consistent returns amidst market fluctuations further solidifies its position as a reliable investment option.
In contrast, upstream companies, primarily focused on oil and gas production, experienced significantly lower returns, averaging a mere 1.5% gain. While a few companies like PrimeEnergy Resources and Comstock Resources achieved substantial gains of 106.5% and 105.9% respectively, the majority of upstream operators struggled to contend with volatile commodity prices and fluctuating investor sentiment. This disparity in performance highlights the inherent risks associated with upstream operations and the challenges of navigating a market susceptible to price fluctuations. The refining segment also faced considerable headwinds, with major refiners like Marathon Petroleum, Valero, and Phillips 66 experiencing an average decline of 6.2%. This downturn was largely attributed to narrowing crack spreads and subdued demand growth, further emphasizing the challenges faced by this segment of the energy sector. Meanwhile, integrated supermajors, like ExxonMobil and Chevron, fared slightly better, benefiting from their diversified operations, but still experienced an average decline of 3.1%. ExxonMobil notably outperformed its peers, achieving an 11.3% gain. These results indicate the impact of market forces on even the largest and most diversified players in the energy sector.
Looking ahead to 2025, the energy sector faces a mix of opportunities and challenges. A potentially more favorable regulatory environment under the incoming Trump Administration is expected to create a more positive backdrop for oil and gas operators. However, the sector’s profitability will remain heavily dependent on the trajectory of commodity prices. The continued production cuts by OPEC+ are expected to provide some support to prices, but the countervailing force of record U.S. oil output will likely limit significant price increases. This dynamic is expected to persist in 2025, leading to modest profitability for the sector overall. While the near-term outlook for the energy sector appears relatively subdued, certain segments, like midstream, remain well-positioned to deliver value to investors due to their stable cash flows and attractive yields. For upstream and refining companies, a sharp focus on cost efficiency and operational resilience will be crucial for navigating the anticipated challenges of 2025. Ultimately, the energy sector’s performance in 2025 is expected to mirror the trends observed in 2024, characterized by moderate prices and selective outperformance by specific subsectors, presenting both opportunities and challenges for discerning investors.
