Energy ETFs Surge Ahead of May Jobs Report: A Sector Rotation Play on Macro Signals

The May employment report, a key gauge of U.S. economic health, has historically influenced sector rotations as investors parse macro signals for clues about demand trends. This month, energy sector ETFs like the Energy Select Sector SPDR Fund (XLE) and Vanguard Energy ETF (VDE) are positioned to outperform amid a confluence of factors: a resilient labor market, manufacturing recovery signals, and the structural shift toward energy transition. Here's why sector rotation into energy is worth considering—and how to navigate the risks.

Macro Signals Point to Sustained Energy Demand

The May jobs report, due May 10, is expected to show stable unemployment (4.2%) and moderate job growth (128,000 new nonfarm payrolls). While slower than previous months, this reflects an economy navigating tariff uncertainties rather than a recessionary shift. Stable employment underpins consumer spending, which remains a key driver of energy demand—especially for transportation fuels.

Meanwhile, manufacturing data offers a critical clue: the ISM Manufacturing Index, which dipped below 50 in April, suggests contraction, but this is balanced by a resilient services sector. Energy demand isn't monolithic—industrial sectors may lag, but services-driven energy use (e.g., travel, hospitality) could hold steady.

The shows that even moderate job growth stabilizes energy demand, favoring ETFs like XLE and VDE.

Why Sector Rotation is Favoring Energy

Investors are rotating into energy for two reasons: valuation and structural tailwinds.

1. Valuation Attractiveness:
   Energy ETFs have lagged broader markets in 2025 (XLE +11%, S&P 500 +15%), creating a valuation discount. The highlights this divergence, with energy underperforming during periods of tech-driven rallies. Now, with the S&P 500 below its 40-week moving average and earnings growth peaking, energy's cyclical appeal is rising.

2. Energy Transition and Natural Gas Outperformance:
   While oil majors dominate XLE and VDE, natural gas stocks like EQT Corp. (EQT) are breaking out to multi-year highs. This sub-sector is benefiting from global supply shortages and the shift toward cleaner energy. The show a steady upward trend, reinforcing the case for energy ETFs as proxies for this theme.

ETFs to Watch: XLE vs. VDE

• Energy Select Sector SPDR (XLE):
  Tracks the S&P 500 Energy Sector, with ~40% in Exxon (XOM) and Chevron (CVX). While concentrated, its exposure to oil majors is offset by its inclusion of natural gas and equipment names. Upside: Analysts see a 12.9% gain to $103.45.

• Vanguard Energy ETF (VDE):
  Tracks the MSCI U.S. Investable Market Energy Index, offering broader exposure to mid-cap producers. Its lower expense ratio (0.10% vs. XLE's 0.09%) and ~15.7% upside potential to $147.82 make it a cost-effective alternative.

Both ETFs are poised to benefit from three macro tailwinds:
1. Stable employment supporting consumer energy demand.
2. Manufacturing recovery in H2/2025, boosting industrial fuel use.
3. Global energy transition driving natural gas and renewables investment.

Risks and Considerations

• Tariff Volatility: U.S.-China trade negotiations could disrupt energy prices if new tariffs target oil/gas exports.
• Oil Price Fluctuations: Geopolitical risks (e.g., Middle East tensions) remain a wildcard.
• Sector Concentration: XLE's oil-heavy tilt could underperform if natural gas gains dominate.

Investment Thesis

The May jobs report will refine the outlook for energy demand, but the macro narrative is clear: a stable labor market and energy transition tailwinds justify sector rotation into XLE and VDE.

Action Items:
- Buy on dips: Use pullbacks below XLE's 200-day moving average ($88) as entry points.
- Overweight natural gas exposure: Pair ETFs with names like EQT Corp. to capture sub-sector outperformance.
- Monitor tariff developments: Avoid overexposure if trade tensions escalate.

The energy sector's valuation gap is closing, and with sustained demand signals, now is the time to position for a sector rotation that could outperform through 2025.

Ben's Bottom Line: Energy ETFs are primed to rebound as macro signals align with structural demand growth. Rotate into XLE or VDE for exposure, but stay nimble on trade risks.