NEW YORK, April 12 (Reuters) - U.S. energy shares are

soaring as investors benefit from rising oil prices and a

stronger-than-expected economy, while seeking to protect their

portfolios from a feared resurgence of inflation.

The S&P 500 energy sector is up about 17% in 2024,

roughly doubling the broader index's year-to-date return.

Its gains have accelerated in recent weeks, making it the S&P

500's best performing sector in the past month.

One key driver is the price of oil: U.S. crude has

risen 20% year-to-date due to an unexpectedly strong U.S.

economy and worries over a broadening Middle East conflict.

Some investors also believe rising energy shares could hedge

against U.S. inflation. Consumer price rises have proven more

stubborn than expected this year, threatening to restrain the

broader stock rally by undermining expectations for how much the

Federal Reserve will cut rates in 2024.

"If inflation is going to pop up again ... the hedge is to

have some commodities exposure," said Ayako Yoshioka, senior

portfolio manager at Wealth Enhancement Group.

The portfolios she manages have been overweight in energy

stocks, including those of oil majors Exxon Mobil ( XOM ) and

Chevron ( CVX ), as she noted more disciplined capital spending

by energy companies.

Among the top energy sector performers so far this year were

Marathon Petroleum ( MPC ), up 40%, and Valero Energy ( VLO ),

up 33%.

The economy will be in focus in the coming week as

first-quarter earnings season heats up, with reports from

Netflix ( NFLX ), Bank of America ( BAC ) and Procter & Gamble ( PG )

. Monthly U.S. retail sales out on Monday will offer a

view into U.S. consumer behavior, on the heels of another

stronger-than-expected inflation report last Wednesday.

Energy stocks have risen as a U.S. equities rally has

broadened beyond the growth and technology companies that led

gains last year. Investors' appetite for non-commodities-related

sectors could take a hit, however, if inflation expectations

keep rising and worries about a hawkish Fed grow.

Inflation fears have made markets more turbulent in recent

weeks. Outside of equities, concerns over rising consumer prices

have lifted gold, a popular inflation hedge, to record highs.

Energy stocks were also thriving outside the U.S.

Shares of miners, steel firms and other commodity-linked

companies have risen along with energy stocks.

"Investors are looking at the world and they're seeing that

the economy really isn't slowing down much ... at a time when

there are various concerns over bottlenecks regarding supplies

of commodities, especially oil," said Peter Tuz, president of

Chase Investment Counsel Corp.

Energy shares fell nearly 5% in 2023, while the broader S&P

500 gained 24%. But their inflation hedging credentials received

a boost in 2022. That year, the S&P 500 energy sector jumped

about 60%, providing a bright spot in a stock market that

plunged as the Fed raised interest rates to fight inflation that

had reached 40-year highs.

Strategists at Morgan Stanley and RBC Capital Markets in the

past week reiterated their bullish calls on energy shares. In a

note, RBC's Lori Calvasina cited heightened geopolitical risks

and a "growing acceptance of the idea that the economy is

actually quite strong."

Analysts are also noting comparatively low valuations. The

S&P 500 energy sector trades at 13 times forward 12-month

earnings estimates compared to nearly 21 times for the overall

S&P 500, according to LSEG Datastream.

Oil prices could take a hit if Middle East tensions ease, or

if global growth starts to wobble, potentially clouding the

outlook for energy shares.

Conversely, strong economic growth could boost corporate

profits and steer investors into other sectors that have done

well this year, such as industrials and financials. Companies in

the S&P 500 are expected to increase earnings by 9% this year,

LSEG IBES data showed.

Marta Norton, chief investment officer in the Americas for

Morningstar Wealth, said her firm owns shares of energy pipeline

companies and other Master Limited Partnerships, or MLPs, which

could protect against firmer inflation.

Still, she believes the economy could begin slowing in

coming months, allowing the Fed to cut rates in June.

"What we see today is that the timing around a Fed pivot and

the timing around how the economy actually slows is really an

open question," Norton said. "You really need to manage a

portfolio for a range of outcomes."