U.S. stocks plummeted on Monday in the afternoon trade, extending the previous week's sell-off amid widespread capitulation. The energy sector, however, led Wall Street's slide amid weakness in oil and natural gas prices, with futures contracts for both commodities down 6 and 10% respectively at the time of this writing. Against this backdrop, Exxon Mobil (XOM) and Chevron (CVX) plunged nearly 7% in midday trading, their worst drop since June 2020.

Oil's pullback appears to be in response to concerns about the demand outlook amid ongoing lockdowns in China due to the COVID-19 current wave, although the risk-averse mood is clearly exacerbating the correction. At the same time, speculation that the European Union may temporarily delay the roll-out of the latest round of punitive measures against Russia, which calls for a ban on oil imports from that country, is also weighing on crude. While the bloc is likely to move forward on a phased-in embargo sometime in the coming weeks, negotiations have hit a roadblock, with several member states seeking exclusions and more time to secure alternative energy sources to vote in favor of the sanctions package.

Focusing on energy stocks, Monday's move may also be related to some profit-taking, as the outlook for the sector has not changed overnight. Despite today's drop, the S&P 500 energy index is up about 40% year-to-date. Meanwhile, the S&P 500 is down more than 15% over the same period. Looking ahead, as sentiment stabilizes and selling pressure eases, the energy sector could lead the way higher and lead Wall Street, helped by strong fundamentals in an environment of strong commodity prices.

While past performance is not indicative of future results, energy stocks have rallied forcefully in the days following a big decline in 2022. To underscore this point, let's look at the XLE, an energy sector fund. In March and April, the index suffered two sharp drawdowns from peak to trough, but the sell-off was brief on each occasion and, within a matter of weeks, the fund had recovered all losses and was making new higher highs.

With investors beginning to prioritize earnings growth and shareholder returns as the macroeconomic outlook becomes more difficult for many companies, energy companies are well placed to meet the new challenges and satisfy the investment criteria set by an increasing number of portfolio managers. That said, energy stocks could resume their ascent once excessive pessimism begins to abate.