- An imminent commodity supercycle will create a bullish backdrop for energy stocks as economic growth rebounds, JPMorgan said in a note on Wednesday.
- Easy monetary and fiscal policy, a weak US dollar, and stronger inflation will spark heightened demand for commodities in the years ahead, the note said.
- Investors are under allocated to the energy sector based off of its current weighting in the S&P 500, JPMorgan highlighted.
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A supercycle in commodities is about to take place and investors can benefit by increasing their exposure to energy stocks, JPMorgan said in a note on Wednesday.
The last supercycle in commodities started in 1996, peaked in 2008, and bottomed in 2020 when oil prices went negative, the note explained. Both the upswing and downswing cycles in commodities lasted 12 years.
Now, the next upswing in the commodity supercycle is set to begin as heightened demand for oil is sparked by a post-pandemic economic recovery, according to the bank. The “roaring 20s” will be accompanied by easy monetary and fiscal policy, a weak US dollar, and stronger inflation, all supportive for commodity prices.
Another potential driver that could spark a surge in oil prices is the “unintended consequences of environmental policies and their friction with physical constraints related to energy consumption and production,” JPMorgan said.
Despite the bullish outlook for commodities, few investors are currently allocated to the space, with the energy sector making up only 3% of the S&P 500.
That's constructive for further price appreciation in commodities, as more investor fund flows hit the energy space as prices continue to recover.
"Given that equity assets significantly increased over the last 10 years, and the energy sector significantly decreased, even a small rotation [into energy] could produce an outsized move," JPMorgan said.
JPMorgan's call for higher commodity prices and a bullish outlook on the energy sector echoes Fundstrat Tom Lee's recent call for the energy sector to surge 42%.
The energy sector is up 18% year-to-date as of Wednesday's close, making it the best performing sector so far this year.
