Why I’m Adding Energy Positions Now

Commentary

The situation in Iran changes almost daily. Although the Trump administration continues to say peace negotiations are progressing, a definitive agreement keeps getting postponed. Furthermore, the fact that the U.S. had to strike missile and drone targets in Southern Iran demonstrates how difficult negotiations have become. The strongest negotiating point the U.S. has is the clear fact that Iran does not want to cap their oil wells, since they would take months to restart.

I expect crude oil prices will remain elevated for the next few months, as many energy-related companies will be reporting strong earnings over the next few quarters. Recently, the Iranian Revolutionary Guards Corps (IRGC) said the possibility of a return to war with the U.S. was “low.” This comment caused crude oil prices to plunge, but I am adding more energy companies since their sales and earnings remain strong.

Global demand for crude oil typically declines in the fall, so I expect gasoline prices to moderate by October, as the President wants lower prices going into the mid-term elections. In the meantime, we have a nice window to reap record profits from tankers and other energy-related stocks. Our big bet in tanker stocks remains safe, due to longer shipping routes as well as the bottleneck in the Strait of Hormuz.

Here are the most important developments recently and what they mean:

– S&P 500 is in the midst of the strongest earnings environment in seven years, and the S&P 500’s earnings are forecasted to rise 21.5% in 2026. We remain in the best investment environment for growth stocks since the Internet boom back in 1999. The current AI boom looks even stronger since it will take at least three years to fulfill the current order backlogs.

– The data center boom, combined with the onshoring boom for semiconductors, pharmaceuticals, and the auto industry, bodes well for explosive GDP growth. The trade deficit is shrinking due to booming energy exports, which will boost GDP growth. Retail sales have been promising in the past couple of months, so that is another positive GDP boost. But by far, the biggest boost to GDP growth is productivity that should be at least 3% per year and may rise to 4% in 2027 and beyond, as AI makes America more productive.

– Our new Fed Chairman, Kevin Warsh, is a big proponent of AI productivity growth and is expected to strive to convince other members of the Federal Open Market Committee (FOMC) that AI-related productivity gains are not inflationary. Energy prices are expected to decline no later than the fall, since worldwide seasonal demand for crude oil drops in the fall. In the meantime, crude oil prices are beginning to moderate as Iran and the U.S. work on a “framework” to reopen the Strait of Hormuz. Although high transportation costs (e.g., diesel and airfare) have caused wholesale goods and service costs to rise, the Fed knows that it cannot control energy inflation, so the Fed is expected to stay on course with another key interest rate cut later this year, due largely to a labor market that is still challenging for many workers.

– Bespoke Investment Group has documented how similar this year is to the 1990s and has overlaid charts of the 1990s internet boom to the current AI boom. Based on those charts, we are not even halfway through the current AI boom and based on the massive order backlogs for AI data centers, it looks like the current AI boom could persist for three more years. As an example, Bloom Energy (BE) announced over $9 billion in quarterly revenue, but also said its order backlog rose by $18 billion in the quarter.

Overall, we have a lot to look forward to. The big news in June is the annual Russell realignment that is expected to boost many small-to-mid capitalization stocks that will be added to the Russell 1,000 and 2,000 indices. We will then have another record earnings announcement season commence in July. After that, we can expect the announcement of 5% to 6% GDP growth, plus a Fed rate cut to help boost employment growth from AI disruptions.