The energy sector has unexpectedly taken a commanding lead in the bull market for 2026, significantly outperforming technology and the broader S&P 500. This shift is driven by factors beyond just inflation or geopolitics, including rising real bond yields that crude oil closely tracks. For investors looking to capitalize on this trend, refining margins, particularly the robust diesel crack spread, offer a compelling opportunity, leading to a focus on companies like Marathon Petroleum.
In a surprising turn of events for 2026, the energy sector, rather than technology, has firmly seized and expanded its lead in the bull market's year-to-date performance. While our focus last week touched upon a Brazilian energy firm, the persistent momentum in energy demands our continued attention.
The numbers speak volumes: The Energy Select Sector SPDR Fund (XLE) has soared an impressive 53.3% year-to-date, dwarfing the S&P 500's 15% gain by more than threefold. Although the Technology Select Sector SPDR Fund (XLK) still shows a strong 36.8% increase, recent weeks have seen tech shares falter as energy stocks surged to new highs.
This trend was further ignited by Wednesday's September CPI report, which indicated headline inflation at 3.7%, slightly above forecasts. This pushed bond yields higher, creating a significant headwind for long-duration growth stocks often found in the technology sector. This, in our view, underscores energy's enduring strength.
Beyond inflation and geopolitical tensions, there's a crucial message emanating from the bond market. Analysis of the 10-year Treasury yield reveals that only real yields are charting new highs, while expected inflation remains subdued. Notably, crude oil prices closely mirror the trajectory of these real yields, a dynamic that will heavily influence future energy trading.
Examining the crude oil chart itself, despite a recent Houthi attack on a Saudi Aramco facility, West Texas Intermediate (WTI) crude is currently consolidating within a tight triangle pattern, bounded by falling resistance in the low $100s and rising support near $90. The direction of its eventual breakout will likely dictate the broader sentiment for the entire energy complex.
In our latest portfolio rebalance, we have maintained a significantly overweight allocation to the energy sector. Our preferred strategy within this space centers on the 'barrel'—specifically, the lucrative refining margins. The diesel crack spread, which represents the profit refiners make from converting crude into diesel, has seen an extraordinary climb from approximately $25 per barrel in January to a September peak exceeding $110, settling around $95 currently. This robust environment explains why the VanEck Oil Refiners ETF continues to hold near its historical highs.
This compelling scenario led us to re-enter a position in Marathon Petroleum (MPC) during our most recent rebalance, reinforcing our overweight stance on energy. Marathon's stock has ascended within a well-defined channel since its 2020 low, currently trading around $477, well above its 200-week moving average of approximately $181. With resistance projected between $600 and $650, there appears to be substantial room for further upside.
While admittedly cautious about adding to already extended names within the energy industry, the market signals suggest that energy stocks are influenced by more than just inflation expectations or geopolitical events. There's a deeper narrative at play. As active managers, our approach is to align with the market's focus, all while having a clear risk management plan in place should conditions change. Marathon Petroleum is scheduled to announce its Q3 results on November 3, prior to market open.
For a comprehensive breakdown, including the bond market's subtle signals, crude oil's relationship with specific bond yields, the drivers behind the diesel crack spread's impact on refiners, and risk management strategies for this extended trade, please refer to the full video analysis.
Todd Gordon is the founder of Inside Edge Capital, LLC. DISCLOSURES: Todd owns PBR and MPC personally and for clients of Inside Edge Capital, LLC. All opinions expressed by the CNBC Pro contributors are solely their opinions and do not reflect the opinions of CNBC, or its parent company or affiliates, and may have been previously disseminated by them on television, radio, internet or another medium. THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSTITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR.
