Trump's executive orders no golden ticket for energy stocks

President Donald Trump dedicated at least four of his roughly 200 executive actions on inauguration day to energy production – but that doesn’t necessarily mean it’s all good news for the sector.

Through a series of orders he issued immediately after taking office Monday, Trump sought to reverse Biden-era tax incentives for electric vehicles, restrictions for drilling on federal land, and limits on tailpipe emissions. Another action halted federal leases of offshore areas for wind projects.

While that does portend well for the availability of fossil fuels, an increase in supply could negatively affect energy companies financially.

“In a vacuum, the expression ‘drill, baby, drill’ may be really good for energy companies, but it’s not good for their bottom lines because (it) means more supply…. But it is good for energy independence,” said Paul Schatz, president of Heritage Capital. “It’s going to be difficult. The energy companies have been burned in these boom-bust cycles with capital spending. Current management will be really skittish with ‘drill, baby, drill.’ I think the best thing for energy, frankly, is a growing and thriving economy, because we just use more energy.”

The S&P 500 Energy Index was steady Tuesday, closing at 710.38, not showing much if any reaction to Trump’s executive orders. However, the index is up slightly, from 692.79 at close on Nov. 5, 2024, which was election day.

Whether having access to more domestic drilling opportunities will be financially beneficial for energy companies is a big question, but policy stances will largely be favorable for the sector, said Travis Miller, energy and utilities strategist at Morningstar.

“Energy companies will get more support from the administration, so that if the market demand comes back, they will be able to make a strong supply-side move,” Miller said.

Despite Republicans’ posturing on clean energy and Biden’s Inflation Reduction Act, it is unlikely that tax incentives and dollars for jobs and economic investments will be seriously threatened, he said.

“There was a lot of rhetoric about rolling back some of the clean-energy subsidies. But if you look at who benefitted the most from the most recent subsidies … they tended to be Republican-dominated areas or swing states,” he said. “We think it’s going to be very hard for Republicans in Congress to get a lot of support from their jurisdictions to overturn any of the incentives that were in the Inflation Reduction Act.”

Additionally, clean-energy projects are benefitting from rapidly increasing demand for electricity, in part because of proliferating data centers powering artificial intelligence.

“We’re going to need ally types of electricity [sources]. You can’t decide to take one source out,” said Bryan McGannon, managing director of US SIF: The Sustainable Investment Forum. “Clean energy is quite inexpensive how. The marketplace will say, ‘Wait a second, wind is actually pretty great in places like Texas and Indiana.’ That complicates some of these proposals that were announced yesterday.”

Potential demand for additional fossil fuels in a global market is also questionable, McGannon said. And in the investing world, sustainability will continue to be a concern, whether fund managers openly admit it or not, he said.

“There’s a reality that public policy chases the market. There may be attempts around the edges to curtail sustainable investing, but the market is pretty far down the road,” he said. “ I don’t think you’ll see anybody stop considering E, S, and G factors, at least for their investment materiality. They may be talking about it less or in different ways.”

Schatz, who said he has been bottom-fishing the Invesco Solar ETF (TAN), or viewing it as undervalued, pointed to the correlation between alterative energy and the price of oil.

“When oil’s really cheap, nobody really wants to invest in alternative energy… People don’t really think about it until oil prices spike,” he said.

“Investors will be rewarded by owning more diversified energy companies than the ones that are so correlated to oil.”