One of the worst parts of the stock market this year is looking like a bargain, says Wolfe Research

The S&P 500 utilities sector is down more than 3% year to date after gaining 13% in 2025 and 20% in 2024; it fell 13% in Q3, its worst quarter since Q1 2020. Wolfe Research strategist Steve Fleishman cited rising yields, Fed tightening, California wildfire-reform setbacks and election noise among the pressures, while noting utilities now trade at about 15 times forward earnings versus 19 times for the S&P 500. He considers valuations attractive and highlighted AES, Evergy and OGE Energy.

Analysis

The valuation case is conditional, not a standalone buy signal: utilities’ duration-like equity cash flows remain vulnerable if long yields keep repricing higher. A historical 15x P/E floor may not hold in a materially different rate regime, and sector-level cheapness does not establish that AES, Evergy, or OGE Energy are equally attractive. The key second-order offset is load growth: data-center demand could support utility investment and earnings, but political resistance may constrain where and on what terms that capacity is built. That creates a split between durable regulated returns and projects exposed to permitting, financing, or merchant-price risk; verify company-specific rate-base plans, funding needs, and guidance before ranking names. Near term, watch the 10-year yield and rate expectations; over 1–3 months, a stabilization in yields plus steady earnings guidance could prompt relative multiple recovery. Over 6–18 months, realized load growth and regulatory treatment matter more than the sector’s entry multiple. Contrarian point: investors may be treating utilities as a uniform bond proxy despite differing growth and business mixes. But the opposite error is to treat a lower multiple as proof that higher capital costs and policy risk are fully priced.

Key Decisions for Investors

• Consider a small, staged XLU-versus-SPY relative-value position only after long-yield momentum stabilizes; scale in rather than buying the valuation floor outright. The thesis is relative multiple recovery, not an assumption that utilities have bottomed.
• Keep AES, EVRG, and OGE on a watchlist rather than treating the analyst’s preference as verified company-level evidence. Before choosing among them, compare current guidance, capital spending and funding plans, regulatory exposure, and sensitivity to data-center demand.
• Falsify the sector-recovery thesis if Treasury yields resume making meaningful highs alongside deteriorating utility guidance or weaker allowed-return outcomes. Reassess positively if yields stabilize and earnings expectations hold without a material rise in political or permitting risk.