Utility stocks have risen this year to an extent not seen in more than 20 years. In the third quarter, utilities rose the most among the 11 sectors that make up the S&P 500, rising 18%. As a group, the utility is on track to post its biggest quarterly profit since 2003, when George W. Bush was president. Year-to-date gains are even higher, at about 27%. If this trend holds through the end of the year, it would mark the biggest annual increase for power companies since 2000, when they soared more than 50%. “Utilities is currently the hottest sector in the market,” Wolf Research’s Rob Ginsburg said in an August client note. That hasn’t happened in this generation. “When was the last time someone said that? It’s been a while.” XLU YTD Mountain Utilities Select Sector SPDR, YTD This year’s strong performance shows a turnaround for the Power & Light Group. Both 2022 and 2023 ended in the red. There are several reasons behind this group’s extraordinary rise. Utilities are thought to benefit greatly from low interest rates, thanks to above-average capital requirements and high dividend yields. And the Fed has just begun what is likely to be a long easing campaign. Additionally, the group is beginning to attract attention from growth investors looking to take on the power generation needed to build large-scale artificial intelligence data centers. September Highs The Utilities Select Sector SPDR Fund (XLU), an ETF that tracks utilities in the S&P 500, confirmed its momentum with multiple all-time highs in September. In fact, Ginsburg noted that traders have been pouring money into the sector in recent months, including into stocks like NextEra and PG&E. Savita Subramanian, head of U.S. equity strategy at Bank of America, echoed this view earlier this month, upgrading utilities from market weight to overweight. He said the group was uniquely positioned to receive a boost from a lower interest rate environment. Part of Subramanian’s recommendation is due to its above-average dividend. In general, he expects the rise of blue-chip income stocks to increase over the next few years, replacing the growth stocks that have dominated the market for the past 15 years or so. “Quality and earnings are the new growth and P/E ratio expansion,” Subramanian wrote to clients, referring to stocks that investors reward with higher price-to-earnings ratios. He noted that the S&P 500 utilities sector’s long-term total return (including the effect of reinvested dividends) is consistent with the Nasdaq Composite Index, and likened its performance to the fable of the tortoise and the hare. XLU .IXIC 5Y Mountain Utilities ETF vs. Nasdaq Composite, 5 Years Some of the buying in utilities came in response to the Fed’s interest rate cuts, according to Bank of America data. In fact, Bank of America found that investors poured nearly $1.3 billion into utilities during the week of the September policy meeting when the central bank cut rates by half a percentage point. This was the largest inflow into the sector seen in the bank’s historical data since 2008. To be sure, there are plenty of warning signs. Christopher Harvey, Wells Fargo’s head of equity strategy, lowered the utility’s rating to neutral from overweight in mid-September, rescinding a rating upgrade for the company in the second half of 2023. He said the sector is no longer an “oversold group with no consensus” now that it has gained support and stock prices have risen. Additionally, Harvey said that after a rally, utility stocks now reflect investors’ decisions to avoid risk and pursue companies that can benefit from lower interest rates. Impending pullback or limited upside Almost all stocks in this sector are looking for gains this quarter. But among the stocks that made the biggest moves, Wall Street sees a decline as imminent or little room for further gains, reflecting the growth in some stocks’ prices. Take Vistra, which was the best performer this quarter. The Texas-based power company’s stock price soared 39%, bringing it up more than 200% since the beginning of the year. Currently, the average analyst surveyed by LSEG expects the stock to move little over the next 12 months based on the consensus price target, even though the average analyst continues to rate Vistra a Buy. are. Vistra Inc. and Constellation Energy Inc. rose 29% in the quarter, posting strong gains on the back of enthusiasm for nuclear capacity and the prospect of selling power to giant data centers that power artificial intelligence. Raised. Analysts don’t expect Constellation to move significantly over the next 12 months. Meanwhile, Houston’s CenterPoint Energy was the only utility stock in the S&P 500 to fall this quarter, dropping 6%. Analysts aren’t too enthusiastic about the outlook either. The typical analyst surveyed by LSEG has a hold rating on the stock and expects the stock could rise 2% over the next 12 months.
