June 13, 2024
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Often thought of as dividend-paying stalwarts, utilities stocks have become some of the most exciting names in the market.
The utilities sector has returned 13% in the three months through June 7th, far outpacing the equal-weight S&P 500’s 1% gain, and making it the top performer among the 11 sectors.
Interestingly, the sector has become a derivative AI play, points out Ryan Hammond of Goldman Sachs Research. The rise of AI is expected to contribute to a substantial increase in power usage over the next decade, which could meaningfully drive electricity producers’ businesses.
Meanwhile, Hammond explains that utilities retain their defensive qualities. “People still need electricity even in challenging economic environments,” which is why “historically, the sector fares better than most when the economy slows.”
Valuations have risen, with much of the sector’s recent gains coming from multiple expansion. Yet Hammond points out that the sector’s price/earnings to growth ratio remains below historical averages, which suggests that the rally is well-grounded in earnings expectations.
“With the sector’s mix of AI exposure and defensiveness,” Hammond says, “we think the utilities rally has room to run.”