Argentina's Oil Sector Dominates Amid Economic Stagnation

Argentina's stock market performance has become increasingly polarized, reflecting a wider economic divide under President Javier Milei. While energy shares flourish due to elevated oil prices, other sectors are faltering.

The S&P Merval index, Argentina’s benchmark stock index, has seen a notable decline of nine percent in 2026 when evaluated in dollars. This drop is a sharp contrast to 2023, when the Global X MSCI Argentina ETF ranked as the top single-country fund. Currently, only stocks linked to the shale oil boom in the Vaca Muerta region are witnessing significant gains.

Multiple sectors—including banking, construction, and consumer goods—are experiencing downturns. Comparatively, the Merval has underperformed not only relative to previous rallies but also alongside equities in other regional markets experiencing election-driven optimism, such as Colombia, Brazil, and Peru.

“Without the energy sector, the S&P Merval would appear quite weak. There aren't compelling stories like there were a year ago,” said Martín Polo, director at Polomics, a local consultancy.

The energy sector's momentum corresponds with a remarkable rise in earnings. High global oil prices, exacerbated by geopolitical tensions, have led state-owned YPF SA to boost its shale production nearly 50% year-on-year in the second quarter. Private companies like Vista Energy SAB and Pampa Energía SA also recorded substantial output and profit increases.

“Energy stock performance is a product of both soaring oil prices and sector-specific developments,” remarked Ricardo Giménez, portfolio manager at Bull Market Brokers. “Vaca Muerta enterprises are ramping up production, reporting exceptional results, and generating positive cash flow in some instances.”

The disparity between the energy sector and broader economic performance has grown since Milei's party won the congressional midterms in 2025. YPF’s stock has nearly tripled, while Vista has more than doubled its value. In comparison, banks and companies tied to the domestic economy remain stagnant, with the Merval's increase in dollar-adjusted terms falling short against leading oil producers.

“Argentine stocks have run out of significant catalysts, and lower trading volumes indicate a shift of investor interest toward global equities,” noted Federico Desprats, an economist with Intervalores. “Currently, the Merval is effectively only being driven by oil and gas.”

This stock divergence mirrors troubling trends in the real economy, where activity fell 1.4% in July compared to a year earlier and dropped 2.9% from the previous month, seasonally adjusted. Manufacturing is among the weakest sectors, while mining continues to expand.

The decline in economic activity presents challenges for sectors linked to domestic markets. Banks are grappling with increased delinquency rates and a tepid lending environment, while the construction industry depends on sustained recovery efforts.

“Should political risks persist, with activity remaining subdued and businesses failing to recover, the catalysts for significant improvement in the main sectors of the S&P Merval will likely be limited in the short term,” warned Giménez.

The lone significant Argentine stock outside the energy domain to post gains this year is Telecom Argentina SA, which has managed a modest five percent rise amid merger and acquisition activity.

Argentina’s energy boom is generating capital inflows against the backdrop of high international prices, allowing the country to strengthen its external accounts. Between January and July, it recorded a trade surplus of more than $16 billion, a result of increased exports.

However, this gain in the trade balance—primarily driven by favorable terms of trade due to ongoing geopolitical conflicts—also signifies a slowdown in domestic activity, which curtailed import growth.

This scenario presents a dual challenge for Milei’s economic model. The dollars flowing in from oil, mining, and agriculture have alleviated Argentina's balance-of-payments issues, but they also contribute to a stronger peso, which negatively impacts other sectors. A robust currency helps to keep inflation in check by making imports cheaper, but it simultaneously dampens demand for locally produced goods and raises dollar-denominated costs for local manufacturers competing against foreign entities.

Some analysts express concerns that the existing capital controls, along with prevailing political uncertainties ahead of next year’s elections, may deter foreign investment. “Investors remain cautious, and existing exchange controls continue,” Polo emphasized. “Energy may be one area of investment, but the rest of the economy hasn’t yet gained momentum.”

by Ignacio Olivera Doll, Bloomberg