Why Did Energy Lag in 2025? The Surprising Truth Behind the Numbers
The S&P 500 capped off 2025 with a stellar 16.4% total return, marking its third consecutive year of double-digit growth. Despite some late-year turbulence, it was a banner year for stocks, with every sector finishing in positive territory. Growth sectors led the charge, fueled by surprisingly resilient consumer spending. (Note: All returns mentioned include dividends.)
Technology reigned supreme once again, delivering a whopping 24.6% return as investments in artificial intelligence, semiconductors, and cloud infrastructure continued to surge. Communication Services trailed closely behind with a 23.1% gain, driven by robust digital advertising, improved platform efficiency, and surprisingly strong profitability in streaming services.
Industrials flexed their muscle, posting a robust 19.3% gain, benefiting from reshoring trends, increased infrastructure spending, and strong order backlogs in transportation, aerospace, and manufacturing. Even Utilities surprised many investors with a 16.0% return, highlighting the potential of yield-sensitive sectors when interest rate expectations shift dramatically.
But here's where it gets interesting: While the energy sector delivered a respectable 7.9% return, it lagged behind the broader market. And this is the part most people miss: this underperformance might be more significant for investors looking ahead to 2026 than the headline number suggests.
Energy Sector: A Tale of Two Stories
A closer look at the energy sector reveals a story of stark contrasts. While the overall sector finished 2025 up 7.9%, this masked significant disparities across sub-sectors. Upstream producers struggled, while refiners, integrated oil majors, and midstream companies delivered far stronger performances.
Data from FactSet (https://www.factset.com/) paints a clear picture: refiners led the pack, rebounding from a difficult 2024. The "Big Three" refiners – Marathon Petroleum, Valero, and Phillips 66 – boasted an average return of 24.6%, with Valero leading the charge with a remarkable 37.0% gain.
Integrated oil companies also staged a comeback after a challenging 2024. Foreign supermajors like TotalEnergies (28.3%), BP (24.5%), and Shell (22.2%) outpaced their U.S. counterparts, ExxonMobil (16.0%) and Chevron (10.1%). While diversified operations provided some buffer against weaker oil prices, upstream exposure still weighed on their performance compared to refiners.
Midstream companies continued their winning streak, following a strong 2024 with another impressive year. The average midstream stock gained 17.2% in 2025, according to FactSet. NGL Energy Partners stood out with a staggering 100.4% gain, and only nine out of 39 midstream companies ended the year in the red, underscoring the sector's appeal to income-focused investors amidst volatile commodity prices.
Pure exploration and production companies, however, lagged behind, with the average upstream stock declining 3.0% for the year. Over half of these companies finished in negative territory, with ConocoPhillips, the largest pure-play producer, dipping 2.3%. A notable exception was Canada, where several producers, led by Suncor (29.7%), posted strong gains.
What 2025 Tells Us About the Future of Energy
The key takeaway from 2025 isn't simply that energy underperformed, but why it did. Returns were increasingly dictated by business models rather than broad exposure to oil prices. Companies with stable cash flows, pricing power, and fee-based revenue streams generally outshone those directly tied to upstream production.
This divergence reflects a broader shift in how capital is allocated within the energy sector. Investors are now prioritizing durability, capital discipline, and downstream leverage over pure production growth. This trend was evident throughout 2025 and is likely to remain a defining characteristic of the sector in 2026.
Looking Ahead: A Nuanced Outlook for 2026
As we turn our attention to 2026, the outlook for energy remains mixed but nuanced. While oil prices will still play a role, they are unlikely to be the sole determinant of returns. Instead, expect continued dispersion within the sector.
Refiners enter 2026 with strong balance sheets and the ability to capitalize on volatility rather than suffer from it. Integrated supermajors offer diversified exposure, but their performance will hinge on effectively balancing shareholder returns with capital expenditures. Midstream companies remain well-positioned as long as volumes remain stable and financing conditions are favorable.
Will energy lead the market in 2026? Probably not. But it's no longer a monolithic sector moving in lockstep. For investors, this presents both risks and opportunities. The winners are likely to be determined less by the direction of oil prices and more by execution, capital discipline, and a company's position within the value chain.
Food for Thought: As the energy landscape evolves, will the traditional focus on production growth become obsolete? Or will it remain a key driver for certain sub-sectors? Share your thoughts in the comments below.
Further Reading from Oilprice.com:
