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A Neglected Stock Market Sector Resonates an Alarm for the Economy


Sep 17, 2023

The utilities sector has experienced a challenging year for investors in 2023, as it has been the worst-performing sector in the U.S. stock market. However, there are signs that this trend may be changing. In September, the S&P 500 Utilities Sector held its ground despite mixed economic data and concerns about rising interest rates that affected other sectors, particularly tech stocks. The utilities sector has actually seen a 3% increase so far in September, making it the best-performing group in the S&P 500 after the energy sector. This outperformance is also notable compared to the Information Technology sector, which experienced a 4.3% decline this month.

According to David Wagner, a portfolio manager at Aptus Capital Advisors, the utilities sector is currently oversold. The sector’s underperformance earlier this year was driven by rising interest rates, which made utility stocks less attractive compared to Treasury bills and money market funds. However, utility stocks are often seen as dividend investments or defensive holdings, offering stable dividends and lower volatility than the overall stock market. The utilities sector is also expected to have a higher dividend yield of 3.3% this year, compared to the S&P 500’s yield of 1.6% and the yields on Treasury bills.

One reason for the utilities sector’s underperformance is the overvaluation of technology companies that have been driven by the artificial intelligence-driven stock rally. However, market analysts believe that utility stocks are currently “already cheap” compared to these overvalued tech stocks. Irene Tankel, Chief U.S. Equity Strategist at BCA Research, suggests that investors could benefit from a potential “snapback” in utility stocks. The S&P 500 Utilities sector has a lower price-to-earnings ratio of 17.4 compared to the broader S&P 500 index and the Information Technology sector. This may indicate that investors are becoming more cautious and looking for protection, as they expect slower economic growth and lower interest rates.

Morgan Stanley strategists also expect utility performance to be supported in the coming quarters due to the correlation between utility stocks and interest rate trends. Additionally, utility valuations are currently cheap compared to their historical relationship with bond yields. Furthermore, there are several key catalysts expected to drive utility stock performance, including significant regulatory decisions and policy support related to renewable energy.

Despite the recent decline in U.S. stocks, there is potential for the utilities sector to rebound. While the past year has been challenging for investors in this sector, changing market conditions and favorable factors may provide opportunities for those looking to invest in utilities.

By Editor

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