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Utilities: A bullish long-term story

Key takeaways

  • The US (and the world) is gradually shifting from a petro-state to an electro-state, which could provide a long-term tailwind for utilities.
  • The sector saw strong relative performance in 2022 for its defensive characteristics.
  • Investors may continue to favor defensive stocks in 2023 given the current confluence of economic headwinds.
  • Electric utilities that are moving toward decarbonization could be particular beneficiaries of the shift to renewables.

For 2023, the outlook for the utilities sector is strong.

The sector's defensive characteristics could continue to look attractive to investors seeking shelter during market and economic choppiness. But the long-term growth story is perhaps even more compelling: The US (and the world) is gradually shifting from a petro-state to an electro-state. Utilities are poised to be primary beneficiaries of that shift.

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Coming off a (relatively) strong year

The year 2022 brought an about-face in market leadership, which benefitted utilities. The sector came into the year relatively undervalued—particularly in comparison to high-flying technology and growth segments that performed so well during the market's pandemic surge.

But as causes for macroeconomic angst started to pile up at the start of the year—from inflation, to interest-rate hikes, to geopolitical conflict—investors began favoring securities with more defensive qualities. Utilities are one of the most defensive parts of the economy, because households and businesses by and large keep the lights on even when the economy is in its darkest hour. By mid-year, utilities had gone from being among the weakest-performing sectors in the S&P 500® to ranking among the strongest.

Chart shows 2022 year-to-date performance for the utilities sector and for the S&P 500.  As of December 9, utilities sector stocks had returned 1.22% at the index level, compared with the S&P 500's 16.17% loss year-to-date on a total return basis.
Past performance is no guarantee of future results. Utilities sector performance is represented by the S&P Utilities Select Sector index. Data as of Dec. 9, 2022. Source: S&P Dow Jones Indices, a division of S&P Global.

A boost from new legislation

The past year also brought a legislative win for the utilities sector. In August, President Biden signed the Inflation Reduction Act into law. Among other initiatives, the act aims to put the US on a path to substantially reduce greenhouse gases and make clean-energy options more accessible and affordable to consumers and businesses.

The legislation includes tax subsidies intended to lower the costs of renewable energy, which should help keep customer rates low. In short, the legislation is expected to accelerate the transition away from fossil fuels to renewable resources for energy generation within the US—hastening that move from petro-economy to electro-economy.

Utilities could remain in favor

As we look to 2023, the economy and markets may continue to face the onslaught of headwinds they've encountered this year—including rising interest rates, persistently high inflation, political unrest, and slowing growth worldwide. Amid this environment, utilities could remain in favor for their defensive characteristics, which include durable cash flows and dividends.

But again, the long-term story could be even more compelling. Utilities are at the epicenter of the transition to renewable energy sources. Generating power from renewable resources is now more economical than generating power from fossil fuels, thanks to technology improvements and increased economies of scale among renewables. Meanwhile, consumers, businesses, and governments are actively seeking to reduce their carbon footprints. These primary factors are propelling accelerated earning growth for utilities, with average earnings growth in the sector recently rising to its highest levels in decades.

Potential beneficiaries

As this energy transition continues, companies that are investing to expand their renewable-energy fleets could benefit. For example, the AES Corporation () and NextEra Energy () have long-standing investments in the renewable energy segment. Such companies have seen solid earnings and dividend growth.

There could also be advantages for companies focused on nuclear energy, as nuclear could be a beneficiary of the Inflation Reduction Act and help bridge the energy gap as generation from renewables ramps up. Constellation Energy () is among the nation's leaders. The company has 23 nuclear reactors, which together generate some 20% of the nuclear energy in the US, and is one of the only pure-play nuclear stocks trading publicly.

Fund top holdings*

Top-10 holdings of the Fidelity® Select Utilities Portfolio () as of October 31, 2022:

  • 15.7% – NextEra Energy ()
  • 10.5% – Southern Co. ()
  • 6.8% – Constellation Energy ()
  • 6.2% – Sempra Energy ()
  • 5.9% – Exelon Corp. ()
  • 5.3% – PG&E Corp. ()
  • 4.3% – Dominion Energy Inc. ()
  • 3.8% – Public Service Enterprise Group ()
  • 3.7% – PPL Corp. ()
  • 3.6% – Edison Intl. ()
(See the most recent fund information.)

Positive backdrop

As the US and countries worldwide march toward carbon neutrality, the utilities sector is at the center of the energy-generation transition from fossil fuels to renewables. The combination of a challenging economic environment and long-term tailwinds from the shift to renewables provides an optimistic backdrop for performance in the utilities sector.

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Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully. * Any holdings, asset allocation, diversification breakdowns or other composition data shown are as of the date indicated and are subject to change at any time. They may not be representative of the fund's current or future investments. The Top Ten holdings do not include money market instruments or futures contracts, if any. Depository receipts are normally combined with the underlying security. Some breakdowns may be intentionally limited to a particular asset class or other subset of the fund's entire portfolio, particularly in multi-asset class funds where the attributes of the equity and fixed income portions are different. Under the asset allocation section, international (or foreign) assets may be reported differently depending on how an investment option reports its holdings. Some do not report international (or foreign) holdings here, but instead report them in a "Regional Diversification" section. Some report them in this section in addition to the equity, bond and other allocation shown. Others report international (or foreign) holding as a subset of the equity and bond allocations shown. If the allocation without the foreign component equals (or rounds to) 100%, then international (or foreign) is a subset of the equity and bond percentage shown.

Views expressed are as of the date indicated, based on the information available at that time, and may change based on market or other conditions. Unless otherwise noted, the opinions provided are those of the speaker or author and not necessarily those of Fidelity Investments or its affiliates. Fidelity does not assume any duty to update any of the information.

References to specific securities or investment themes are for illustrative purposes only and should not be construed as recommendations or investment advice. This information must not be relied upon in making any investment decision. Fidelity cannot be held responsible for any type of loss incurred by applying any of the information presented. These views must not be relied upon as an indication of trading intent of any Fidelity fund or Fidelity advisor. Investment decisions should be based on an individual's own goals, time horizon, and tolerance for risk. This piece may contain assumptions that are "forward-looking statements," which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize or that actual returns or results will not be materially different from those described here.

Past performance is no guarantee of future results.

Investing involves risk, including risk of loss.

Stock markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. Investing in stock involves risks, including the loss of principal.

Because of its narrow focus, sector investing tends to be more volatile than investments that diversify across many sectors and companies. Sector investing is also subject to the additional risks associated with its particular industry.

The utilities industries can be significantly affected by government regulation, financing difficulties, supply and demand of services or fuel, and natural resource conservation.

The S&P 500® Index is a market capitalization-weighted index of 500 common stocks chosen for market size, liquidity, and industry group representation to represent US equity performance. The S&P Utilities Select Sector index comprises those companies included in the S&P 500 that are classified as members of the utilities sector, with capping applied to ensure diversification among companies within the index.

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