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Utilities Sector

Utilities Sector Rating: Marketperform

Utilities sector overview

A growing U.S. economy could create a headwind for the utilities sector, the potential for rising inflation could lead to higher interest rates, reducing the attractiveness of dividend-paying utilities companies.

Market outlook for the utilities sector

A recent shift in market leadership and concerns that we may be at a near-term peak in growth has led to better performance for the utilities sector and we recently upgraded the group to marketperform.

Market outlook for the utilities sector

The utility sector has received a boost recently as investors moved into defensive sectors as concerns over global growth were exacerbated by the ramping up of trade rhetoric. We don’t believe this is the start of a prolonged market downturn but the shift in market leadership could last for several months as peak growth concerns are met with trade concerns and, while we still warn against using high-yielding equities as a replacement for fixed income, we recently upgraded the sector from underperform to marketperform.

We think U.S. economic data will continue to show growth, but the rate of improvement is slowing, as evidenced by the decline in the Citibank Economic Surprise Index, which could make the more defensive utilities sector more attractive. Inflation readings have perked up, but remain contained for now, which could entice investors into the higher-yielding sector, with the Consumer Price Index moving up to a still modest 2.9% year-over-year rise.

There are some additional positives for the sector as some of the fundamentals in the utilities sector have perked up, with BCA Research reporting that electricity production is rising, while their valuation indicator has corrected out of overvalued territory.

We haven’t all of a sudden gotten bullish on the utilities sector, and it still seems unlikely to be a substantial outperformer in our minds, but enough of the negatives we were looking at have dissipated in our view that an underperform rating is no longer appropriate, resulting in our upgrade to the group to marketperform.

Factors that may affect the utilities sector

Positive factors for the utilities sector include:

  • Improvement in housing: An improving housing market could lead to higher electricity demand in developing areas, and we're seeing signs that may be occurring as electricity production is growing again.
  • Attractive dividends: Dividend-paying stocks could remain attractive compared to relatively low yields on conservative fixed-income products. And should economic prospects decline, defensive, dividend-paying stocks could become even more attractive.

Negative factors for the utilities sector include:

  • High fixed costs: Capacity growth has been rising, which has been a sign of underperformance for the sector in the past.
  • Accelerating economic growth: This would likely make the defensive utilities sector less attractive.
  • Rising interest rates: This would make the dividend-paying utilities sector less competitive with fixed income investments. Additionally, relatively high debt ratios in the sector could be problematic.

Clients can see our top-rated stocks in the utilities sector.

Want to learn more about a specific sector?  Click on a link below for more information or visit Schwab Sector Views to see how they compare.

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Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The Consumer Price Index (CPI) is an index that measures the weighted average of prices of a basket of consumer goods and services, weighted according to their importance.

The Citi Economic Surprise Indices measure data surprises relative to market expectations. A positive reading means that the data releases have been stronger than expected and a negative reading means that the data releases have been worse than expected.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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