The energy sector has been the best-performing sector in the S&P 500 this year - and it's not just because risks to global oil flows, tied to Venezuela and Iran, have boosted crude prices by more than 9%.

Higher oil prices have been a major tailwind for the energy sector, said Rob Thummel, senior portfolio manager at Tortoise Capital. But more significantly, "investors are rotating toward sectors with hard-to-replace essential assets."

That's "reinforcing the strategic value of energy infrastructure and domestic resource security," Thummel said.

'Investors are rotating toward sectors with hard-to-replace essential assets.'Rob Thummel, Tortoise Capital

So far this year, the S&P 500's energy sector XX:SP500.10 has climbed by more than 21% as of Thursday - outperforming other sectors in the S&P 500 SPX, including materials XX:SP500.15 and consumer staples XX:SP500.30. It's on track to mark its second-best start to a year at this point since 2022, based on data going back to 1990, according to FactSet data.

The S&P 500's energy sector has outperformed other sectors so far this year.

On Thursday, the energy sector had eased back by 1.8% to $832.10, down from its all-time closing high of $847.77 the day before.

Energy security

Energy security has become a "competitive advantage" for the United States, according to Thummel.

If artificial intelligence represents the next industrial revolution, then "low-cost U.S. energy - enabled by shale technology - is a foundational input to winning the global AI race," he said.

"Reliable, scalable power is now a strategic asset" just like semiconductors and data centers, he said. Against that backdrop, investors are recognizing the "value of low-cost, cash-generating energy businesses."

Among the components of the S&P 500 energy sector on Thursday, shares of Exxon Mobil (XOM) fell 2.1% but were trading up by nearly 26% year to date. Chevron's stock $(CVX)$ traded 1.2% lower Thursday, although was still up 20% so far this year, while ConocoPhillips $(COP)$ edged down by 0.6% during the session to trade 18% higher year to date.

The energy sector is surging after three years of lagging the S&P 500's strong performance from 2023 through 2025, FactSet data show. Last year, the energy sector rose 5%, trailing the S&P 500's 16.4% jump.

Energy stocks are value-oriented and look relatively cheap, Mabrouk Chetouane, head of global market strategy at Natixis Investment Managers, said in an interview Thursday. Chetouane also expects energy companies to benefit from the buildout of AI infrastructure, saying investors expect earnings growth in the sector as Big Tech spends massively on artificial intelligence.

Overall, the energy sector is offering what investors seek the most: high free-cash-flow generation, strong and growing dividends, meaningful share buybacks, inflation protection and real-asset exposure, said Tortoise Capital's Thummel.

He added that the free-cash-flow yield of the energy sector is materially higher than the broader market's - historically at roughly 7%-plus, compared with around 4% for the S&P 500. That reinforces its income and value appeal, he said.

Room to run

History, meanwhile, suggests the sector's surge may have more room to run, according to Bespoke Investment Group.

While most sectors have beaten the S&P 500 this year, "none of them hold a candle to energy's gain of over 23%," Bespoke said in a note emailed Thursday.

"Since sector data begins in 1990, this year's gain ranks as the second-best start to a year through [Feb. 11], trailing only the 26.5% gain to start 2022," the firm wrote, pointing to the chart below.

In the three previous years that the energy sector rallied more than 10% to start the year through Feb. 11, "it also rallied at least 15% for the remainder of the year," according to the Bespoke note. "It's a small sample size, but energy bulls would like to hear that."

The gains in energy equities as well as oil prices - with U.S. benchmark West Texas Intermediate crude (CL00) (CL.1) up more than 9% so far this year - come despite an abundance of global oil supplies.

This year, the world's oil supply is forecast at 108.6 million barrels per day - above demand expectations of 104.872 million barrels per day, according to a monthly report from the International Energy Agency released Thursday.

In 2025, the energy sector was a story of falling prices, rising inventories and negative earnings growth, said Rob Haworth, senior investment-strategy director at U.S. Bank Asset Management Group.

This year, however, energy prices have stabilized with cold U.S. winter weather, and fourth-quarter earnings are on the upswing following a "challenging" first three quarters of 2025, he noted. Inventories remain high, but investors are starting to look for an "upswing" in demand, partly due to the energy needs of AI and overall global economic growth expectations.

To keep the rally in the energy sector going, "growth expectations will need to be realized, with an uptick in manufacturing activity as well as further [Federal Reserve interest-rate] cuts later this year," said Haworth.

"Energy companies are likely to maintain financial discipline, so further resource development is likely to be measured, and oil and natural-gas prices could eventuall catch up to expectations in current company prices," he said.