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Energy Shares Send U.S. Stocks Higher

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05/17/2018 | 07:13pm CEST

By Riva Gold and Michael Wursthorn
-- Major stock indexes edge higher
-- Treasury yields hover near recent highs
-- European stocks rise

Energy stocks surged Thursday to lead major indexes higher, as investors continued to bet that oil-and-gas companies' fortunes will rise alongside oil prices.

The S&P 500 added 0.2% in recent trading. Energy companies in the broad index jumped more than 1%, pulling the S&P 500 out of an early-morning slide and putting it on track for a second-straight day of gains.

The Dow Jones Industrial Average added 20 points, or 0.1%, to 24789, while the Nasdaq Composite gained 0.2%.

Energy companies continued their torrid pace of gains and are on track to post their best quarter since late 2011 as oil prices have rallied to hit levels that haven't been seen in years. Brent crude, the global oil benchmark, climbed past $80 a barrel, and the U.S. oil benchmark, West Texas Intermediate, edged further past $70.

The spike in oil prices has given energy companies a massive boost, with many expected to report big gains in profit and revenue thanks to the climbing commodity costs. Energy companies in the S&P 500 have added 16% since the end of March, better than the 10 other sectors in the broad index, including shares of technology companies, which are only up 4.5% over the same time.

Energy companies have also gotten better at enticing investors at a time when the leaders of the market -- shares of technology and consumer discretionary companies -- have shown signs of weakness during the volatility that caused major indexes to bump in and out of negative territory this year.

Oil-and-gas companies, as well as the service providers who work with those firms, are using their newfound revenue to buy billions of dollars worth of shares and pay higher dividends. Energy stocks in the S&P 500 are yielding about 2.8% via dividends, up from 2.5% in 2016 and better than the 1.9% for the broader S&P 500, according to S&P Dow Jones Indices.

Energy shares have room to move higher, according to analysts who say many investors are still wary of the sector after oil prices crashed several years earlier, pulling those stocks down along the way.

"There's pockets within energy that are doing well," said Craig Sterling, head of U.S. equity research at Amundi Pioneer, a nearly $90 billion asset-management firm. "But you have to believe in the sustainability of the commodity," he said, adding that the longer term threat to energy shares is costly spending on capital-intensive projects that could stretch through another bout of falling oil prices.

Valero Energy led the S&P 500 higher Thursday and added nearly 5% after Morgan Stanley analysts upgraded the stock, encouraging investors to grab shares. Marathon Petroleum, Halliburton and Phillips 66 all added more than 3%.

Rising commodity prices have contributed to higher inflation expectations, pushing bond yields higher. Yields on 10-year Treasury notes rose Thursday to 3.108% from 3.093% late Wednesday, which was the highest settlement since 2011. Yields move inversely to prices.

Some investors worry that higher yields and higher interest rates could hurt stocks by raising borrowing costs for companies and making bonds look more attractive in comparison.

"We think 3.25% would be the number that would cause us to lean a little bit more forward in our chair," said Eric Freedman, chief investment officer at U.S. Bank Wealth Management. Already, more attractive yields on shorter-dated U.S. debt have prompted U.S. Bank to shift some of its investments out of the stock market and into short-term paper, he said.

Elsewhere, stocks in Hong Kong and Australia closed lower, while the Stoxx Europe 600 edged up 0.8% as shares of Ocado Group jumped after the U.K. online supermarket said it has agreed to sell a 5% stake to Kroger and that it would provide its delivery technology to the U.S. grocer.

Earlier, Japan's Nikkei rose 0.5%, supported by a recent decline the yen, which tends to boost earnings of multinationals translating earnings from abroad. Shares elsewhere in Asia mostly ended the day lower. Hong Kong's Hang Seng fell 0.5% despite a rebound in shares of Tencent Holdings, Asia's most valuable company.

Write to Riva Gold at [email protected] and Michael Wursthorn at [email protected]

Stocks mentioned in the article
ChangeLast1st jan.
DJ INDUSTRIAL -0.30% 24811.76 Delayed Quote.1.19%
HANG SENG 0.06% 30757.8 Real-time Quote.3.86%
NASDAQ 100 -0.06% 6949.6986 Delayed Quote.7.35%
NASDAQ COMP. -0.02% 7424.4287 Delayed Quote.6.53%
NIKKEI 225 0.06% 22450.79 Real-time Quote.0.73%
S&P 500 -0.20% 2727.76 Real-time Quote.2.23%
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