The Utilities sector has been sensitive to concerns about trade friction and slowing global economic growth—performing better when growth and trade concerns resurface and interest rates fall, and underperforming when those concerns fade. We also are concerned about valuations, which have risen above historical levels.
The U.S. economy has slowed along with the global economy, making the traditionally defensive utilities sector more attractive. Inflation has been tame, and dividend-paying stocks could remain attractive compared to relatively low yields on conservative fixed-income products. Meanwhile, an improving housing market could lead to higher electricity demand in developing areas.
On the other hand, the Utilities sector has high fixed costs. Capacity growth has been rising, which has tended to signal underperformance for the sector in the past. If economic growth begins to accelerate, it would likely make the traditionally defensive utilities sector less attractive. Finally, if inflation accelerates and the Federal Reserve needs to reverse its recent course and begin raising short-term interest rates again, the high-dividend-paying utilities sector could become less competitive versus fixed income investments. In addition, the sector’s relatively high debt ratios could become problematic.
As a result, we have a marketperform rating on the Utilities sector.
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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