It hasn\u2019t been a great year for investors to own stocks in the utilities sector \u2013 the worst-performing part of the U.S. stock market so far in 2023 \u2013 but that could be coming to an end.\u00a0<\/p>\n
The S&P 500 Utilities Sector The utilities sector has also outperformed the information technology sector \u201cUtilities are very oversold right now,\u201d said David Wagner, portfolio manager at Aptus Capital Advisors. \u201cIt seems that given this oversold nature that the rubber band is so stretched so far in one direction that one ought to always be on guard for some type of abrupt flip to the script.\u201d<\/p>\n Utility stocks got slammed earlier this year when higher interest rates made the sector less attractive compared to Treasury bills and money-market funds.\u00a0<\/p>\n Unlike fast-growing technology stocks, utilities stocks are often considered dividend-income investments or defensive holdings, especially during economic downturns or recessions. The companies that provide electricity, water and gas utilities usually offer investors stable dividends, as well as less volatility compared with the overall stock market.\u00a0<\/p>\n The utilities sector is expected to pay a dividend yield of 3.3% this year, more than twice the 1.6% of the S&P 500 \u201cIt\u2019s a normal connotation that when rates go higher, utility stocks tend to underperform, and obviously utilities tend to be a defensive, interest-rate sensitive sector,\u201d Wagner told MarketWatch in a phone interview. \u201cDuring a risk-on rally [this year], utilities underperformed, so you\u2019ve had a perfect storm for the underperformance of utilities year-to-date.\u201d\u00a0<\/p>\n That is why investors could benefit from the utilities sector that is \u201calready cheap\u201d compared to technology companies which are usually considered high-risk investments but are now among the most overvalued after an artificial intelligence-driven rally earlier this summer, said Irene Tunkel, chief U.S. equity strategist at BCA Research.\u00a0<\/p>\n The S&P 500 Utilities Sector is trading at 17.4 times its estimated earnings for the following 12 months, while the broader S&P 500 is trading at 19.4 times its expected earnings and the S&P 500 Information Technology Sector is trading at 27.8 times its projected earnings for the same period, according to FactSet data.<\/p>\n See: <\/strong>Opinion:\u00a0For better gains in tech stocks from here, look beyond the \u2018Magnificent Seven\u2019<\/p>\n However, market analysts think \u201can abrupt snap-back\u201d in utility stocks may also point to some \u201crisk-off\u201d trades or deeper anxiety about the U.S. economy.\u00a0<\/p>\n \u201cThe consensus view is that the yields will come down as they\u2019ve already topped out,\u201d Tunkel told MarketWatch via phone on Friday. She said the economic growth will slow down in the absence of \u201csurprises\u201d which have been moving the markets in 2023, and the \u201ceconomic-surprise trade\u201d will come to an end.\u00a0<\/p>\n \u201cMany people are now looking at different sectors because they think that rates will come down because economic growth was too slow \u2014\u00a0 they\u2019re actually looking for defensives,\u201d Tunkel said.\u00a0<\/p>\n Strategists at Morgan Stanley forecast the 10-year Treasury yield to retreat to 3.35% by the second quarter of 2024 in their base case. They said the market is vulnerable both to a slowdown in growth and cooling of inflation amid healthy growth \u2014 two outcomes that investors do not seem prepared for.<\/p>\n \u201cThis could be supportive of utility performance over the next several quarters given the correlation between utilities and the trend in rates,\u201d said David Arcaro, executive director of equity research at Morgan Stanley. \u201cWe also think utility valuations screen cheap relative to the S&P, relative to the last 10 years on an absolute basis, and inline with the long term relationship vs. bond yields so there could be valuation support over this timeframe.\u201d (See chart below)<\/p>\n <\/p>\n There are other catalysts that Morgan Stanley strategists expect to drive utility stocks\u2019 performance in the near term.\u00a0<\/p>\n Several stocks in the utilities sector \u201chave meaningful regulatory decisions\u201d coming this year related to project approvals or settlement in electric-rate cases, said Arcaro and his team, in a Thursday note.\u00a0<\/p>\n For example, the PPL Corporation\u2019s \u201cWe see several opportunities where these regulatory processes have acted as overhangs on the stocks, and where we see a strong likelihood of success and positive rerating as the regulatory decisions are achieved,\u201d Arcaro and his team said.\u00a0<\/p>\n
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\n has stood its ground in September as a batch of mixed economic data and fears of higher interest rates have rattled financial markets, especially technology stocks. The utilities sector has advanced over 3% so far in September and is by far the best-performing group in the S&P 500 after the energy sector
\n XX:SP500.10,<\/span>
\n according to FactSet data. <\/p>\n
\n XX:SP500.45,<\/span>
\n which has fallen by 4.3% this month, by the widest margin since December 2022, according to Dow Jones Market Data.\u00a0<\/p>\n
\n SPX,<\/span>
\n but well below the 4.321% yield of the 10-year Treasury bill
\n BX:TMUBMUSD10Y
\n and the 5.03% yield of the 2-year Treasury note
\n BX:TMUBMUSD02Y,<\/span>
\n according to FactSet data.<\/p>\nKey utilities catalysts into year-end<\/h2>\n
\n PPL,
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\n plan to replace 1,500 megawatt of aging coal generation with cleaner energy mix in Kentucky by 2028, is seeking approval from the Kentucky Public Service Commission with a decision expected by November 6, the company said on its second-quarter earnings call. Shares of PPL are up nearly 3% in September.\u00a0<\/p>\n