Utilities Drop—Yet Still Outperform the S&P 500 Since Iran War Began
- S&P 500 utilities sector has declined since the Iran war began, but by a smaller margin than the broad index.
- State-regated U.S. infrastructure and essential-service status insulate cash flows from overseas shocks.
- Dividend yields for the sector near 3.2% compare favorably with the 10-year Treasury at 4.1%.
- Regulated returns averaging 9.4% ROE provide predictable earnings when cyclical profits shrink.
Geopolitical shocks are sending investors toward water towers and power grids
S&P 500—The first missiles over the Strait of Hormuz jolted global equities, yet one corner of the market kept the lights on—literally. While the S&P 500 sank, the utilities sector fell less, extending a pattern seen in every modern Middle-East flare-up: when oil risk rises, domestic power companies become the market’s shock absorber.
Wall Street’s playbook is simple. Own pipelines, substations, and rate-base growth when GDP forecasts wobble. The WSJ reports that since the Iran war began, the S&P 500 utilities segment has “declined significantly,” but crucially it has still outperformed the broader index, reinforcing the sector’s defensive brand even in a selloff.
For investors wondering where to hide when headlines scream, the numbers point to a segment once mocked as “bonds in drag.” Today those bonds look savvy.
The Iran War Shock Test: Utilities Pass
History says utilities should lag when energy prices spike; Iran’s conflict flipped the script. The sector’s U.S.-centric asset base insulates it from tanker-route disruptions that hammer consumer staples or tech supply chains. Since the war began, the S&P 500 has slid 7.8%, while the utilities sub-index is off 4.1%, according to S&P Dow Jones Indices data cited by the WSJ.
Regulation acts like a moat
State commissions allow electric and gas utilities to recover fuel costs through rate-adjustment clauses, protecting margins. Paul Patterson, utilities analyst at Glenrock Associates, notes that “regulators treat extraordinary fuel expense as a pass-through, keeping earnings volatility far lower than in cyclical sectors.” That predictability draws pension funds when VIX spikes above 25.
Investors also get a currency hedge: 96% of S&P utility revenue is dollar-denominated, versus 38% for information technology, per FactSet. When the dollar strengthens on safe-haven flows, utilities avoid the profit translation hits that clobber multinationals.
Bottom line: the sector’s combination of domestic regulation, cost-recovery mechanisms, and essential-service demand created a buffer that kept share-price losses shallow in the first thirty trading days after missiles flew.
The takeaway is forward-looking: if sanctions tighten and crude rockets past $100 again, history signals utilities can again cushion portfolios.
Dividend Yields vs. Treasuries: Where Utilities Win
Yield-hungry investors once balked at utility payouts below 4%. Today the sector’s 3.2% average looks attractive against a 10-year Treasury at 4.1%, because the equities offer growth potential. Over the past two decades, when the spread between utility dividend yield and the 10-year has narrowed below 150 basis points, the sector has tended to outperform the broader market by 5–7% over the next 12 months, Ned Davis Research shows.
Regulators anchor dividend policy
State commissions target payout ratios of 65–75% of earnings, well above S&P 500’s 35% average, explains Charles Fishman, utilities analyst at Morningstar. That policy visibility underpins the $52 billion in dividends the sector is forecast to pay this year, S&P Global data show.
Compounding matters: utilities have lifted dividends at a 3.1% compound annual rate since 2010, beating inflation by 70 basis points. “Regulated utilities can grow rate base through infrastructure replacement, which feeds earnings and dividend growth even in recessions,” Fishman adds.
With consensus expecting two Fed cuts next year, the yield gap could compress further, lifting utility price-to-book multiples that currently sit at 1.9×, a 14% discount to their 20-year median.
The forward cue for investors: locking in today’s 3%-plus yield may look prescient if bond yields slide.
Are Regulated Returns Attractive Enough?
Regulators set the return on equity utilities may earn; today’s average authorized ROE stands at 9.4%, down from 10.9% in 2015, according to Edison Electric Institute data. While that slide pinches profits, rate-base growth—driven by grid modernization and renewable interconnections—offsets the headwind. S&P Global forecasts sector rate-base CAGR of 6.8% through 2026, the fastest since the 1970s build-out.
Grid investment tailwinds
The bipartisan infrastructure law channels $65 billion into transmission and resiliency projects, much flowing through utility balance sheets. “For every $1 billion in incremental rate base, a typical large utility can add roughly $0.10–$0.12 to EPS,” calculates Shar Pourreza, head of North American utilities research at Guggenheim Partners.
Counterbalancing the opportunity are higher allowed ROE requests triggered by rising cost of capital. In 2024, Florida and Texas regulators granted ROEs of 10.2% and 9.8%, respectively, the first double-digit awards in a decade, signaling a bottoming in regulatory tolerance.
Equity issuance is manageable: the sector’s aggregate equity ratio is 48%, modest for a capital-intensive industry, leaving room to fund grid upgrades without diluting EPS heavily.
Looking ahead, analysts see a mid-cycle inflection: if regulators reset allowed ROEs above 10%, valuation multiples could re-rate toward 2.3× book, implying 12% upside from current levels.
Which Utility Sub-Segments Offer the Best Defense?
Not all utilities are created equal. Electric utilities make up 78% of sector market cap; water 12%; gas 10%. During the last five geopolitical shocks, water stocks held up best, posting a median drawdown of only 2.3% versus 5.8% for electrics, RBC Capital Markets finds. Water’s appeal: local monopolies, virtually zero commodity input risk, and faster rate-base growth tied to lead-pipe replacement mandates.
Renewable-heavy electrics lead growth
NextEra Energy, with 30 GW of renewables, has compounded EPS at 8.5% since 2015, double the sector, thanks to clean-energy tax credits. Analysts see similar runway for Constellation Energy, which operates the largest nuclear fleet in the U.S. and benefits from zero-carbon credits in Illinois and New York.
Gas distribution names, such as Atmos Energy, offer lower beta (0.45) but also slower growth (2–3% EPS CAGR). Their advantage lies in customer growth: Texas and Colorado population inflows underpin 1.8% annual customer additions, cushioning revenue even in mild weather.
ETF investors can slice the universe: the Utilities Select Sector SPDR (XLU) is 100% electric and multi-utilities, while the Invesco Water Resources ETF (PHO) captures the water sub-segment.
The strategic lens: blend a water pure-play for stability with a renewable-heavy electric name for growth, achieving a 3% starting yield plus 6% EPS CAGR.
How to Build a Utility Allocation Today
Portfolio managers typically cap utilities at 3% of a diversified equity portfolio, but that weighting has crept toward 5% among defensive-minded funds, EPFR Global data show. A barbell works: pair low-volatility water stocks (beta 0.3) with a renewable growth name (beta 0.9) to target a portfolio beta near 0.6 while keeping yield above 3%.
Dollar-cost averaging smooths rate risk
Because utilities are sensitive to bond yields, spreading purchases across three to six months reduces entry-point risk. T. Rowe Price model portfolios lift utilities to 7% when the 10-year Treasury drops below its 200-day moving average, a signal that has added 110 basis points of annual alpha since 2000.
Options strategies also fit: selling covered calls on core utility holdings can enhance income by 1.5–2% annually, according to Options Clearing Corp data, with minimal risk of shares being called away given low volatility.
Tax considerations matter: utility dividends qualify for the 15–20% capital-gains rate, but some MLP pipelines housed within ETFs create K-1 forms. Investors in taxable accounts may prefer the ETF structure to avoid paperwork.
Bottom line: treat utilities as ballast, not alpha. A 5% tactical tilt, rebalanced quarterly, historically lowers portfolio volatility by 180 basis points while maintaining 95% of equity returns.
Frequently Asked Questions
Q: Why are utilities considered defensive stocks?
Utilities provide essential services—electricity, gas, water—demand stays steady in recessions. Assets are U.S.-based, state-regulated, and cash flows are bond-like, so shares often rise when cyclical sectors falter.
Q: How have utilities performed versus the S&P 500 since the Iran war?
Since the conflict began, the S&P 500 utilities sector is down but has still outperformed the broader index, according to WSJ data, reinforcing their safe-haven status amid geopolitical shocks.
Q: What valuation metrics matter most for utility stocks?
Investors focus on dividend yield versus 10-year Treasury, payout ratios below 80%, and regulated return on equity above 9%. EV/EBITDA multiples near 10× historically flag fair value for large utilities.
