Services are headed for the best quarter since 2003. What analysts see next
Utility stocks this year have made a rally not seen in more than two decades. In the third quarter, utilities led the 11 sectors that make up the S&P 500, rising 18%. As a group, utilities are poised to post their biggest quarterly profit since George W. Bush was president in 2003. Year-to-date gains are huge, at around 27%. If that continues through the end of the year, utilities will see their biggest annual increase since 2000, when they rose more than 50%. “Utilities are the hottest sector in the market right now,” Wolfe Research’s Rob Ginsberg said in a note to clients in August. It hasn’t been like that in a generation. “When was the last time someone said that? It’s been a while.” XLU YTD mountain Utilities Select Sector SPDR, YTD Strong performance this year marks a turnaround for the energy and light group. It finished in 2022 and 2023 in red. There are several reasons behind the group’s unusual gathering. Utilities are seen as the biggest beneficiaries of low interest rates, due to their above-average capital requirements and high profit margins. And the Federal Reserve has just embarked on what could be a long easing campaign. Also, this group is starting to get a look from the growing investors who want to play the production of the energy needed to build a large database of artificial intelligence. September highs The Utilities Select Sector SPDR Fund (XLU), a utilities ETF tracking the S&P 500, hit multiple highs in September, underscoring momentum. Indeed, Ginsberg noted that retailers in recent months have poured money into the sector, including stocks such as NextEra and PG&E. Bank of America’s head of US equity strategy, Savita Subramanian, echoed that view earlier this month, promoting the services to is the excess from the market weight. He said the group has a unique opportunity to gain momentum in a low interest rate environment. Part of Subramanian’s recommendation comes because of their above-average earnings. In general, you expect high-quality income stocks to gain prominence in the coming years, replacing growth stocks that have dominated the market for 15 years or more. “Quality and earnings are new growth and P/E expansion,” Subramanian wrote to clients, referring to stocks that investors have rewarded with high price-to-earnings multiples. He noted that the long-term total return of the S & P 500 utilities sector – including the effect of reinvested shares – was in line with the Nasdaq Composite’s, likening their performance to the tortoise and the hare myth. XLU .IXIC 5Y mountain Utility ETF rivals Nasdaq Composite, 5 years Part of the utility buying came as the Fed cut rates, according to Bank of America data. In fact, Bank of America found that investors pushed nearly $1.3 billion into services during the week of the central bank’s policy meeting in September when it fell half a point. That marked the sector’s biggest revenue seen in the bank’s historical data, dating back to 2008. Certainly, the warning flags abound. Wells Fargo’s head of equity strategy, Christopher Harvey, downgraded resources to overweight in mid-September, pushing back the company’s growth to late 2023. He said that it is no longer “a consensus oversold group” as the sector has gained favor and stocks are strengthening. In addition, Harvey said that after the expiration, stocks are now being used to reflect investors’ decision to avoid risk and pursue companies that will benefit from soft interest rates. Future reversals or limited gains Almost all stocks in the sector track quarterly gains. But for those who have seen the biggest moves, Wall Street sees a looming pullback or a little room for more appreciation, which shows how far some stocks have run. Take the quarter’s best performer: Vistra . Shares of the Texas-based energy company surged 39%, bringing its annual gain to more than 200%. Now, the average analyst polled by LSEG sees the shares moving slowly over the next 12 months, based on the consensus price, as the average analyst continues to rate Vistra a buy. Vistra and Constellation Energy – up 29% in the quarter – saw big gains on the back of its nuclear power boom and the idea of ​​selling electricity to large data centers used to power artificial intelligence. Analysts don’t see Constellation moving much in the next 12 months. On the other end of the spectrum, CenterPoint Energy of Houston was the only utility stock in the S&P 500 to fall this quarter, down 6%. Analysts are less enthusiastic about its prospects as well. The average analyst surveyed by LSEG has a hold rating and estimates that the stock could gain 2% over the next year.
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