The sector in the cross hairs of the bond sell-off looks poised for a bounce, says Mike Khouw
An interesting tug of war is happening in one of the market's hottest sectors: utilities.
TL;DR
- Utilities are impacted by both the AI boom (increasing demand) and rising Treasury yields (competition for income investors).
- Rising interest rates have disproportionately affected capital-intensive utility stocks and utilities' dividend attractiveness.
- The Utilities Select Sector ETF (XLU) has declined from recent highs due to surging yield curves.
- The long-term structural demand for power, driven by AI, remains intact.
- Independent power producers have seen their earnings multiples compress significantly.
- The sector's valuation is now more attractive, trading around its 10-year average P/E multiple.
- AI-driven power demand is identified as a multi-year secular tailwind.
- A bull call spread on XLU is suggested as a defined-risk bullish trade.
- Key resistance is expected at recent peak levels, with the 50-day moving average aligning with an upside target.
- Implied volatility across the utility sector is generally low, making options spreads efficient.