This week we take a close look at what look very much like bubbles in the US energy sector and in raw materials in Europe. In real terms, oil prices are nudging their all-time highs, which date back to the end of 1979 and the Islamic revolution in Iran. Brief though it was, that peak was enough to trigger severe recessions in 1980 and 1982...

Unquestionably, there is a bubble in oil company profits, although masked by what look like low PERs. EPS have risen 8.7 times over since 1994, and this is another record. The sector’s share prices have risen ‘only’ 512% over the same period, but are extremely vulnerable to a change in the economic situation. No satisfactory solution to the energy crisis has yet been found, with most initiatives aimed at boosting supply remaining marginal relative to real requirements. This means that the only way out is a serious slowdown in consumption arising in a context of recession. All the oil shocks of the past ended in this way....

Technically speaking, the energy sector could outperform further in the months ahead, but the correction could be brutal, as is the case with cyclicals. We recommend neutrality on the sector, and sales in line with bad news on the economy.