Investing.com - The U.S. energy sector has had a strong start to 2025, despite macro uncertainty, and Morgan Stanley has updated its models to reflect this.

Despite generally cautious investor sentiment on oil markets, the energy sector has had a strong start to 2025, rising 8% year-to-date, outperforming the S&P 500 index by around 10%, according to analysts at Morgan Stanley, in a note dated March 26.

In general, this strength has been led by more defensive pockets of the sector (large cap producers, majors, midstream) and natural gas .

Within Exploration & Production, 4Q results brought divergent performance across the group. Several small and mid-cap oil producers posted weak results and soft 2025 (or 1Q) guidance, in some cases due to inventory degradation and operational noise. Larger peers generally fared better, with several highlighting further capital efficiency gains.

The U.S. bank has refreshed its estimates and price targets to incorporate the fourth-quarter results, 2025 guidance, updated reserves, and the latest well performance data.

“Overall, our price targets are moving 9% higher for gas producers, 11% lower for oil E&Ps, and -3% for integrateds. Intrinsically, we estimate oil E&Ps reflect ~$60 long-run WTI, ~10% below the 12-month strip while gas stocks are pricing in ~$3.75 Henry Hub, 17% below the 12-month strip and -25% vs 2026 MS forecast of ~$5,” Morgan Stanley said.

“Looking ahead, we retain our defensive bias and preference for gas over oil.”