ETF Insights | January 1, 2025 | Utilities Sector
S&P 500 Utilities Sector Price Action & Performance
The Utilities Sector enters 2025 in the midst of an intermediate-term price and relative downtrend. Oscillator work (chart below, panels 3 & 4) has shifted to oversold levels, but price remains in a distributional structure amidst a negative momentum divergence. Rising rates have been a headwind in the 2nd half, and a reversal there could offer relief. However, we think investors would react to lower rates by targeting higher beta exposures with more potential upside. This leaves Utilities in a potentially difficult position.
S&P 500 Utilities Sector: Industry Performance Trends
The Independent Power & Renewables industry was carried by VST in 2024 and posted outperformance vs. the S&P 500 of 8%. While prices were stable, each other Utilities industry underperformed.
S&P 500 Utilities Sector Breadth
Shorter-term breadth measures (% of stocks above the 50-day m.a.) have reached wash out levels below 10%, while most stocks remain above their 200-day m.a. There is potential for a bounce here, but we are skeptical Utilities would bounce higher than the broad market. We think the path to outperformance revolves around a move lower, but if rates rise high enough to spark recession fears, the sector could be viewed as a risk-off haven.
S&P 500 Utilities Sector Top 10 Stock Performers
Another sector without a single stock posting a gain in December. We wonder if we will see more of this going forward as quantitative modelling and strategic investments that all benchmark to the same indicators push and pull high beta and low beta exposures.
S&P 500 Utilities Sector Bottom 10 Stock Performers
Our favorite names in the sector populate the bottom performers list. CEG and VST the two momentum plays from 2023 are finally consolidating gains in earnest. Stocks that have been very weak in 2024 like AWK and ES continue to be punished.
S&P 500 Utilities Sector Fundamentals
The chart below shows S&P 500 Utilities Sector FCF yield, and Dividend Yield as well as projected earnings over the next 3 years, valuation and trailing margins. A steady double-digit net margin for the sector (chart below, bottom panel) would likely provide stability if equities hit the skids. Dividend yields are showing as negative on the chart which requires some looking into on our part through our data provider.
Economic and Policy Developments
Power Generation and Nuclear Energy: Nuclear energy gained renewed attention in December as policymakers and industry leaders highlighted its importance for achieving net-zero emissions goals. The Biden administration proposed extending incentives for nuclear power generation, which could benefit operators like Exelon and Entergy (ETR). Meanwhile, uranium suppliers reported stable demand growth, reflecting a steady increase in nuclear capacity utilization.
Alternative Energy and Renewables: Renewable energy remains a critical driver for utilities, with federal funding from the Inflation Reduction Act (IRA) and state-level mandates supporting solar, wind, and battery storage projects. NextEra Energy expanded its renewables pipeline in response to rising demand for clean power from both utilities and corporate buyers. However, challenges such as supply chain constraints and fluctuating commodity prices for key components like solar panels and wind turbines remain ongoing concerns.
ESG and Decarbonization: Environmental, social, and governance (ESG) policies continue to influence utility strategies. Regulatory bodies emphasized stricter emissions standards for coal-fired power plants, accelerating the transition to cleaner alternatives. The utility sector is also facing rising scrutiny from ESG investors regarding transparency in carbon reduction targets and progress toward net-zero goals.
2025 Outlook
The US Utilities sector is positioned for steady growth in 2025, driven by increased investments in renewable energy, grid modernization, and decarbonization efforts. The ongoing shift toward clean energy sources, supported by federal incentives and ESG mandates, is expected to benefit leading players like NextEra Energy and Dominion Energy. Nuclear energy, often considered a reliable base-load power source, is likely to gain further traction, with potential policy developments favoring its expansion.
However, the sector faces headwinds, including rising costs associated with infrastructure upgrades, regulatory compliance, and commodity price volatility. Additionally, ongoing debates around rate structures and customer affordability could impact profit margins for utilities seeking rate increases to fund clean energy projects.
As the US moves closer to its 2030 climate goals, utilities are expected to play a central role in achieving emissions reductions. Companies that successfully navigate regulatory challenges, optimize their clean energy portfolios, and manage operational costs are poised to outperform. The sector’s defensive characteristics and alignment with long-term sustainability trends make it an attractive option for investors seeking stability and ESG-aligned growth. We expect Utilities to be a safe haven if equities face corrective action in 2025, but we are skeptical they can keep pace with a continued bull market trend which is our bas case as 2025 kicks off.
In Conclusion
The Utilities sector couldn’t sustain positive momentum into year end. We would wager on outperformance only if bearish scenarios surfaced in 2025, but that is not our base case for equities. We start 2025 with the Utilities Sector as one of our three zero-weight positions resulting in an underweight of -2.67% vs. the S&P 500 in our Elev8 Sector Rotation Model Portfolio.
Data sourced from Factset Research Systems Inc.
