To The Moon

So far, in FY 2024, Utilities stocks have had an incredible run.

However, has Wall Street’s hottest trade come too far, too fast?

Wall Street analysts are starting to suspect that it has. (see below)

Judging by recent price action, many investors appear to agree as well.

The ETF that tracks utilities stocks in the S&P 500 has retreated from a record high reached earlier this month. (see above)

According to FactSet, the $Utilities Select Sector SPDR Fund(XLU)$ dropped by about -2.5% on Wed, 09 Oct 2024.

This drop comes after XLU reached its highest price of $81.47 per share on 02 Oct 2024.

Flows into XLU and other utilities-focused funds seemed to have dried up of late.

Performance review.

Looking back, XLU performance over the past 3 months has been particularly robust. (see above)

Per FactSet, it has risen nearly +18.6% through September for its biggest quarterly gain since 2003.

YTD the fund is still up by +24.4% vs S&P 500 YTD’s gain of +21.4%.

If it finishes the year at or above its current level, the Utilities sector would clinch its best calendar-year gain this century as per FactSet data show.

Still, rockier times could lie ahead.

Utilities’ Dip Catalysts.

There are 3 catalysts responsible for utilities stocks’ fall from grace, according to MarketWatch:

(1) Shift in interest rate expectations:

• Stronger economic data has changed expectations about the Fed's interest rate cuts.

• This has led to higher Treasury yields that move inversely to prices, negatively impacting utilities stocks in the process.

(2) Stretched valuations:

• Utilities stocks have moved from being undervalued to potentially overvalued.

• As of now, the sector is considered "fairly valued" after the significant run-up in 2024.

For example,

In 2024, $Vistra Energy Corp.(VST)$ stock price has gone up more than +236%. (see above)

The return is even higher than stocks of AI companies like $NVIDIA Corp(NVDA)$.

As a result, Vistra Corp. is now valued much more than its earnings over the past year.

However, its valuation looks better when compared to what analysts expect it to earn in the next year.

(3) Over-enthusiasm about AI-related potential:

• Utilities were seen as a cheaper way to invest in artificial intelligence (AI).

• Deals like $Constellation Energy Corp(CEG)$'s agreement with Microsoft boosted enthusiasm. (see below)

• However, the benefits of these AI-related developments may be overestimated or take longer to materialize than investors expect.

• Morningstar, Energy & Utilities strategist, Travis Miller, pointed out that the process of restarting CEG’s Three Mile Island shuttered nuclear plant will take years.

• How much CEG and Microsoft will benefit and how much utilities companies stand to benefit from these deals remains to be seen.

What Wall Street Thinks.

Analysts who study charts are saying that utilities stocks could continue to slide in the weeks ahead..

(1) BTIG, Chief technical strategist, Jonathan Krinsky:

• Expects a correction of between -7% & -10% in XLU.

• One reason is that these stocks are trading at a very high premium compared to their average price over the past 200 days.

• This is the highest premium since 2003.

(2) Sentimentrader, Senior research analyst, Jason Goepfert:

• Warns that these stocks often do poorly after they go up a lot, when compared to their 200-day average.

• Rising Treasury yields will likely continue to heap pressure on utilities, which have recently tended to fall when yields have risen.

(3) RBC Capital Markets, Hd of U.S. equity strategy, Lori Calvasina:

• Commented that her team’s outlook on utilities stocks have dimmed.

• Currently, less money is flowing into utilities funds.

• That could imply that investors are getting less excited about rate cuts or AI.

• She also said that utilities are no longer compelling on a valuation basis.

(4) DataTrek, Co-founder, Nicholas Colas:

• Is still cautiously optimistic about utilities.

• He thinks they will do well when interest rates go down further.

• Utilities will (likely) continue their ascent when bond yields start heading lower.

• That happens when the Fed continues to cut interest rates.

• He is convinced the AI trend is not over yet.

• Utilities may not be the best-performing group over the next 12 months, but it should continue to outperform.

My viewpoints : (mine only)

Firstly, we must recognize that Wall Streets analysts are humans, not god.

They too, can make mistakes in their analysis, especially when considering economic or political factors.

Recently, investors have lost some faith in AI due to high costs and low returns. (see above)

However, AI will likely become more widely used over time.

Countries and companies that embrace and apply AI will progress faster than those that don't.

Analysts who doubt AI relevance should recognize that it is here to stay and flourish, in a big way, whether they like it or not.

And just like that, utilities companies’ future will continue to look bright due to continuous massive energy consumed by AI technology processors.

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