Shares of utility companies are emerging as a rare bright spot in the U.S. stock market, which has been rocked by turbulence and a shift away from high-flying technology stocks. The utilities sector has been the top performer in the S&P 500 since the benchmark index hit its record high on July 16, rising 4% while the broader index has lost about 7%.
Stability and Dividends Attract Investors
Utilities have traditionally been seen as “bond proxies” due to their strong, stable dividends. This year, the sector has gained more appeal due to a fall in Treasury yields, making utilities more attractive to income-seeking investors. The utilities sector currently offers a dividend yield of 3.15%, compared to the S&P 500’s yield of 1.7%.
“The start of Fed rate-cutting cycles are typically characterized by defensive sector outperformance, similar to the rotation that has occurred during the past week,” noted strategists from Goldman Sachs. Historically, utilities have outperformed in the months surrounding the first rate cut in a cycle, a trend that appears to be repeating.
Additionally, the expected increases in electricity use needed to support artificial intelligence (AI) applications have also lifted utilities stocks. “They tick a lot of boxes right now,” said Chuck Carlson, CEO of Horizon Investment Services, which owns utilities including Nextera Energy.
Solid Earnings and Future Prospects
Utilities companies are also showing strong second-quarter profit growth, with the sector’s earnings on pace to rise 13.5%, according to LSEG IBES. For the full year, utilities earnings are estimated to increase 12.4%, compared to 10.5% for the overall S&P 500. This robust performance is helping to solidify utilities as a safe haven for investors during market volatility.
Paul Nolte, senior wealth advisor and market strategist at Murphy & Sylvest Wealth Management, pointed out that the increasing energy needs driven by AI could boost the bottom line for many utility companies. “The huge energy need is going to be something that could wind up in the bottom line for a lot of utility companies,” Nolte said.
As the Federal Reserve is expected to cut interest rates in the coming months, utilities’ strong dividends and stable earnings make them an attractive option for investors looking for safety and income. This defensive posture has helped utilities stand out as the stock market experiences a selloff, particularly among high-growth tech stocks.
Sector Performance and Market Dynamics
The utilities sector is now up more than 15% for the year, closing in on the performance of the technology and communication services sectors, which include mega-cap stocks like Nvidia and Apple. The sector’s rise is also linked to the decline in the 10-year Treasury yield, which has dropped from nearly 4.5% at the start of July to 3.9%, as investors anticipate Fed rate cuts.
This shift in market dynamics underscores the appeal of utilities during uncertain times. Their stable earnings and dividends offer a safe harbor for investors amid broader market volatility. The sector’s performance highlights a broader trend where defensive investments gain favor as economic conditions become more unpredictable.
The combination of strong dividend yields, robust earnings growth, and the potential for increased energy demand due to AI developments positions the utilities sector as a compelling investment option. As the market navigates through turbulence, utilities continue to provide a reliable and attractive alternative for cautious investors.
Source: Reuters
