Energy stocks are back close to their record high again, and the reason is pretty simple: a quick ceasefire in the Middle East no longer looks likely.
On Tuesday, the S&P Energy Index gained up to 1.8%. Should that gain hold through the close, it would be the index's first record close since March 27.
The index peaked earlier in the year, then energy stocks fell 16% by early July as a short pause in fighting raised hopes of a deal between the US and Iran. Those hopes faded quickly.
Since that July 1 low, the sector has jumped 20%. Investors have now stopped betting on a quick end to the standoff, and oil prices have done the rest.
Brent crude, the international oil benchmark, has climbed about 50% this year. Higher oil prices are the whole ballgame for energy companies, so the stock move makes sense.
The move has been building for months, not days.
For energy companies, the math is simple. When the price of the product jumps, most of that extra revenue falls to the bottom line.
Chevron's profit per share grew more than 240% in the second quarter compared with a year earlier. Exxon's earnings rose 115% in its July report.
In July, Valero reported the best quarterly profit in its history on a per-share basis. PBF and HF Sinclair each had their best profits in years.
Chevron also expects about $12.5 billion in extra free cash flow, the money left after running the business, by 2026.
That is the kind of number that funds buybacks and dividend hikes. It also gives companies room to raise their dividends, which is a big reason investors own energy stocks.
James West, an analyst at Melius Research, thinks the market has decided that oil and fuel prices will stay high for a long time.
He says that means energy stocks could still have room to run even after this move.
For you, the question is whether this rally still has room, or if a headline out of the Middle East can send it backward. That part is worth watching closely.
The stakes are higher now because the sector has already moved so much.
The catch: If a ceasefire does happen, investors do not expect a repeat of the earlier selloff. They have already adjusted to high oil prices, so the drop may be softer.
Markets move on headlines, and the Middle East is full of them.
For your portfolio, the bigger picture is simple. Energy is a reminder that a single geopolitical story can move a whole sector for months.
Oil stocks already reflect a lot of good news, and some of that good news is now visible in company earnings.
That gives the rally a firmer foundation than it had in the spring, even if it does not make it risk-free.
The bottom line: If you own a broad index fund, you already own some of this. Whether the move continues depends on oil prices, politics, and how much of the good news is reflected in stock prices.