Sleepy utilities sector shines as haven from US stock turbulence

[August 07, 2024]  By Lewis Krauskopf

NEW YORK (Reuters) - Shares of utilities companies are presenting investors with a rare bright spot in the U.S. stock selloff, as turbulent markets prompt a shift away from the high-flying technology stocks that have led gains for most of the year.

Utilities has been the top-performing S&P 500 sector since the benchmark index hit its record high on July 16, rising 4% while the broader index has lost about 7% following its recent swoon.

The utilities sector is now up more than 15% for the year and closing in on technology and communication services, which were last up 17% and 18% in 2024, respectively, and include megacaps such as Nvidia and Apple.

A fall in Treasury yields that has come as investors factor a greater number of interest rate cuts by the Federal Reserve has made utilities - which pay strong dividends - more attractive to income-seeking investors. Like Treasuries, the sector is often desirable during uncertain times, because of their stable earnings and dividends, investors said.

This year, utilities stocks have also been lifted by excitement over artificial intelligence because of the expected increases in electricity use needed to support AI applications.

"They tick a lot of boxes right now," said Chuck Carlson, CEO at Horizon Investment Services, which owns utilities including Nextera Energy.

Power lines are seen during a heatwave with expected temperatures of 102 F (39 C) in Dallas, Texas, U.S. June 12, 2022. REUTERS/Shelby Tauber/File Photo

Utilities are often referred to as "bond proxies," for their strong, stable dividends that compete with Treasury yields. The utilities sector currently has a dividend yield of 3.15%, compared with the S&P 500's yield of 1.7%, according to LSEG data. The 10-year Treasury yield of 3.9% is down from nearly 4.5% at the start of July, as investors expect Fed rate cuts in coming months. Utilities historically have been the best-performing sector in the period that includes the three months before and after the first rate cut in a cycle, according to an analysis by Goldman Sachs strategists. "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," the Goldman strategists said in a note late on Monday. Utilities companies are also in the process of putting up solid 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 with 10.5% for the overall S&P 500. Paul Nolte, senior wealth advisor and market strategist, at Murphy & Sylvest Wealth Management, said investors are realizing that utilities' results "might be a little bit better than expected over the next decade or so as the computing power for AI ... gets ramped up." "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.

(Reporting by Lewis Krauskopf; Editing by Ira Iosebashvili and Marguerita Choy)

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