What is the utilities sector?
It includes electric, gas and water utilities; independent power producers and energy traders; and companies that produce electricity using renewable sources.
The Utilities sector has tended to perform better when growth and trade concerns resurface, and to underperform when those concerns fade. That’s partly because of the sector’s traditional defensive nature—people need water, gas and electric services during all phases of the business cycle—and because it has very little international exposure. That suggests that signs of improvement in the global economy and easing of trade concerns could be a drag on the sector.
Meanwhile, Utilities stocks are among the most negatively affected by rising interest rates. The sector has high fixed costs and relatively high debt ratios, which could become problematic if there is any faltering of demand, or higher interest rates. The sector has experienced poor momentum relative to the other sectors—both on a short- and long-term basis—which could continue if interest rates continue to trend higher, as we expect they will.
While defensiveness can be attractive in uncertain times, we are increasingly concerned about valuations, which have risen to well above historical levels both on an absolute basis and relative to the other sectors.
Sector Overview: Utilities is negative on Macro, Value and Fundamental
Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or anticipated tax legislation.
Source: Charles Schwab, as of 01/23/2020.
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
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. Clients can log in to see our top-rated stocks in the Utilities sector.
* As represented by the S&P 500 index
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