Why American Investors Are Set Up to Lose in the Next Energy Bull Market

One of the latest theories gaining traction on Wall Street is that energy stocks have way better prospects than their valuations suggest. Many investors in the major U.S. indexes via exchange-traded funds (ETFs) may assume that any bump in oil and gas stocks will net them better returns.

Today, the energy sector accounts for just 3% of the S&P 500, 2% of the Dow Jones Industrial Average, and 0% of the Nasdaq 100, J.C. Parets, founder of Trend Labs, noted in a June 2025 Investopedia Express podcast. “Investors in America just don’t have exposure to energy, and I think they’re really vulnerable.”

How Energy Stocks Vanished From Your Portfolio

In 2010, energy stocks comprised more than 10% of the S&P 500. Fast forward to July 2025, and the sector’s representation in the world’s most invested in index is down to just 3%.

How did this happen? Most indexes are market-cap weighted, meaning the companies most popular with investors get the biggest share in the index, and energy stocks have been falling out of favor.

Historically, investors have valued oil and gas stocks due to their strong cash generation, generous dividends, and diversification appeal—they tend to perform differently from other companies. However, just as many investors were shying away from oil and gas stocks because of climate change concerns, they were also finding them less appealing than exciting tech companies with high growth potential.

The Supply Shock Nobody’s Preparing For

The primary driver of energy share prices is the cost of a barrel of oil, which is influenced by the dynamics of supply and demand. When there’s more supply than demand, prices fall and vice versa.

A popular opinion among investors is that climate change targets, sluggish economic growth, and recessionary risks could weigh on demand for oil, Parets noted. But he said that bulls like him think that demand will not drop and that supply will come under pressure, leading to shortages that will push prices and profits higher.

A combination of factors is expected to cause these shortages, including the following:

The problem is that most investors aren’t positioned for this potential energy rally.

Positioning for a Potential Energy Comeback

Investors buying into the theory that energy stocks will soon be back in fashion have several options to place their bets. One is to identify the individual companies best placed to benefit and then screen them to determine which tick the most boxes. Metrics to look at include the following:

• Enterprise value-to-EBITDA.
• Debt to EBITDA.
• Interest cover.
• Free cash flow to equity.
• Dividend yields,
• Dividend payout ratio and coverage ratio.
• Return on assets.

Another option is to gain exposure to the entire sector or a subsector through an energy-themed ETF like the Energy Select Sector SPDR Fund (XLE), which has about a 7% one-year return and an expense ratio of 0.09% as of mid-July 2025. This approach can be cost-effective and alleviates the pressure of trying to pick the winners, a task that even the pros often struggle to achieve.

The Bottom Line

Investors have increasingly been turning to index funds for low-cost exposure to the entire stock market. In recent years, this move has really paid off, although it’s also come at the cost of heavier concentration in a handful of popular tech companies and a squeezing of the diversification that was always one of their main selling points.

“The worst thing that could happen to the American investor is a leadership regime in energy,” Parets said. “They’re not ready for it.”