By Jinjoo Lee
Utilities are historically considered defensive stocks. Less so recently.
Few sectors appear more war-proof than utilities, whose assets are contained in the U.S., protected by state regulation and provide an essential service. Yet since the Iran war broke out, the utilities sector of the S&P 500 has declined significantly.
Utilities are down 4% since the start of the conflict, outperforming the broader index by 3.5 percentage points. By contrast, utilities outshined in the weeks after Russia invaded Ukraine, at one point trouncing the market by nearly 12 percentage points.
Nonetheless, utility stocks today offer decent value and still have defensive characteristics. Investors shouldn't overlook them.
Artificial intelligence may have spoiled utilities' defensive reputation. ChatGPT launched nine months after Russia's Ukraine invasion, taking tech stocks and power industry-exposed stocks on a wild rally. Much of the eye-watering growth was concentrated in independent power producers such as Vistra, which is up more than sixfold since ChatGPT's launch, and Constellation Energy, which is up more than threefold.
The majority of companies that make up the utilities sector of the S&P 500 are regulated entities that haven't seen explosive growth. Overall, utilities in the S&P 500 are up 28% since ChatGPT's debut, compared with the overall index's gain of 56%.
That may still be faster growth than what the sleepy sector is used to. But data centers are only part of utilities' growth story.
Utilities requested rate increases of roughly $22 billion in 2025, up 35% from what they requested a year earlier, according to S&P Global Energy. That was driven in part by pent-up demand to replace aging infrastructure and meet state-driven renewable energy mandates, the research firm noted. Some of these investments -- particularly those meant to replace creaky equipment -- seem like the types regulators may be inclined to greenlight even if inflation runs rampant or the economy enters a downturn.
True, utilities don't screen well against fixed-income investments. The dividend yield of utilities in the S&P 500 are at 2.6%, compared with 10-year Treasury yields of about 4.4%. Dividend growth hasn't kept up with utilities' rising earnings growth expectations.
Utilities' allowed returns on equity have also been pressured lately because of concerns over rising electricity bills. Utility regulators tend to be either elected or appointed by elected officials, so they may feel more political pressure to limit returns on equity when ratepayers feel squeezed.
If investors become concerned about a downturn, particularly one linked to slowing data-center spending, rate-base expectations will moderate. Investors will start comparing the sector's dividend yields and allowed returns on equity to fixed-income alternatives, notes Hugh Wynne, analyst at SSR. Arguably, though, the Federal Reserve is more likely to be cutting interest rates in a downturn, making Treasury yields comparatively less attractive. Kevin Warsh is the White House's pick as the next Fed chair partly because it believes he will be inclined to lower rates. He is set to take over in May if the Senate confirms him.
Utility valuations hold up better next to equities. The sector trades at an average of under 19 times expected earnings, just 4% higher than its own 10-year average. Utilities remain 6% cheaper than the overall index, a slightly less enticing discount than the 8% gap over the past decade.
Investors looking for less data-center exposure to hedge against a possible AI downturn have options. New York's Consolidated Edison, is an example of a "classic defensive utility with no AI influence," says Jay Rhame, chief executive officer of Reaves Asset Management, which manages utility exchange-traded funds. Data centers aren't flocking to the utility's territory in part because electricity prices there are high. Southern Co. and Duke Energy do have data-center exposure but are so big that they are still less leveraged to AI, he said. ConEd, Southern and Duke all have dividend yields above 3%.
Utilities are growthier today, but they haven't lost their defensive streak. That could be a winning combination.
Write to Jinjoo Lee at jinjoo.lee@wsj.com
(END) Dow Jones Newswires
March 30, 2026 05:30 ET (09:30 GMT)
Copyright (c) 2026 Dow Jones & Company, Inc.
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