ETF Insights| December 1, 2024 | Utilities Sector
Price Action & Performance
The strong 6-month bullish reversal in Utilities paused in November and has lost momentum in the near-term. Using XLU as a proxy for the sector, price made a new high in absolute terms after a rally into month-end, and we have a cautiously optimistic outlook on the sector with rates now in consolidation after a post-election rise.
Overall, the technical status of the sector is ambivalent after a period of sustained strength from February through August of this year.
At the industry level, Gas and Indy power Utilities have outperformed while Water and Electric Utilities lag. At the stock level names like CEG and VST persist in strong uptrends, likely due to optimism about the re-integration of nuclear power as a fuel source and the generally de-regulatory stance on power generation expected from the in-coming Trump administration.
Economic and Policy Drivers
A critical concern is the nation’s reliance on Russian nuclear fuel, which has prompted efforts to rebuild domestic nuclear fuel supply chains. Centrus Energy, for instance, has resumed manufacturing centrifuge technology essential for nuclear fuel production, aiming to reduce dependence on Russian imports that constitute 44% of global uranium enrichment capacity.
In response to escalating electricity demand driven by the electrification of transportation, buildings, and industrial sectors, the U.S. electric power industry is preparing for a potential tripling of electricity demand in the coming decades. This surge is further amplified by the expansion of data centers and the integration of artificial intelligence technologies, which significantly increase power consumption.
To address these challenges, the Department of Energy (DOE) has announced substantial investments aimed at modernizing and expanding the electric grid. Notably, the DOE has allocated $3.46 billion in grants to 58 projects across 44 states, focusing on grid resilience, smart grid enhancements, and innovative grid technologies. These initiatives are expected to facilitate the integration of approximately 35 gigawatts of renewable energy by 2030 and support the development of 400 microgrids.
However, the sector faces challenges, including the need for significant infrastructure upgrades to accommodate renewable energy sources and the growing demand for electricity. Utilities are seeking rate increases to fund these improvements, with state regulators approving nearly $10 billion in rate hikes in 2023—a figure that could rise further in 2024.
Given the high costs associated with onshoring and modernizing power generation capabilities including expansion into nuclear energy, we expect the level of interest rates will be key to the sector for fundamental reasons as well shaping perceptions on the attractiveness of high-dividend stocks vs. other factors. If rates move lower, we think the sector will be in good shape. The picture gets dicey if rates move higher from here.
In Conclusion
XLU is likely to be useful in December as increasing uncertainty around the election may cause continued rotation and/or correction in equities. Our Elev8 Sector Model starts December with an OVERWEIGHT allocation to XLU of +0.64% above the benchmark S&P 500.
Chart | XLU Technicals
- XLU (200-day m.a. | Relative to S&P 500 | MACD | RSI)
- XLU’s bullish reversal has hit pause as investors focus on accumulating cyclical exposures in the near-term.
XLU Relative Performance | XLU Industry Relative Performance | 3-Months
Data sourced from FactSet Research Systems Inc.
