One of the strongest sectors to start off the new year has been solar stocks as evidenced by the Invesco Solar ETF
There are a few factors to account for this outperformance which also explain why solar stocks underperformed for most of 2021 and 2022. For one, energy prices have also been modestly rising which is supportive of alternative energy prices. Remember that solar stocks and oil prices peaked simultaneously during the early months of 2021 along with Russia's invasion of Ukraine.
And, it's fair to expect that this trend should continue given that China seems fully committed to reopening its economy and pivoting away from its zero-COVID policy. Already, real-time economic data of metrics like metro ridership, miles driven, and airline bookings are on the rise and approaching 80% of pre-pandemic levels. It's also fair to expect some sort of pent-up demand effect as we saw in the rest of the world, once these policies were relaxed. It's estimated that this could add about 2 million barrels per day to daily demand.
Another factor is that many solar stocks are also Chinese stocks which means that rising tensions between the two countries was a major headwind given the possibility of further sanctions and even de-listing. Yet, China has also seemingly taken a more non-confrontational approach and even seems willing to back away from supporting Russia's invasion of Ukraine. This thawing of tensions is another headwind that is now a mild tailwind.
Finally, another major factor is that longer-term rates have peaked as the 10-year Treasury yields dropping from 4.3% to 3.5% between October and today. Rising longer-term rates are a headwind for solar stocks (and all growth stocks), because it means these companies' future cash flows are less attractive. As these yields decline, it should lead to more inflows for the asset class especially as fundamentals continue improving.
And while the macro backdrop is certainly improving, it's also worth noting that the top solar companies like First Solar