The utilities sector has experienced a roller coaster of performance in the past. Still, utilities are now playing a defensive role amid recent economic and market uncertainty. Despite tariffs and other macroeconomic concerns, most US utilities continue to plan for their largest capital investment growth cycle in decades.
Given the evolving sector, financial advisors must stay informed on key trends to initiate valuable conversations and support clients. Here’s what to know about this evolving sector.
A Glimpse at Today’s US Utilities Industry
Utilities have been a clear favorite among investors during the past few months as concerns around tariffs, inflation, and recession pushed investors out of other sectors. As of late June, the Morningstar US Utilities Index is up 12% in 2025 and 26% in the last 12 months, including dividends, handily beating the US market and topping every sector.
Our Q2 2025 US Utilities Sector report found that most US utilities were trading at premiums to our fair value estimates as of mid-May, and utilities stocks keep climbing even as interest rates remain at multidecade highs.
Key Themes in 2025
While past performance has varied, our outlook report suggests this year may bring new opportunities and challenges for utilities. Excitement around lower interest rates has ebbed, and our analysts believe valuations fully reflect artificial intelligence-related energy demand growth potential. But risks include data center delays, an inflation rebound, and regulatory pushback on customer rate increases.
Data Centers
The AI craze helped power utilities’ market-beating returns last year. Although our base case assumes data center electricity demand will represent 3% of US electricity demand, the outlook is trending toward our bull-case scenario, which has it more than doubling by 2032 and representing 4.5% of total US electricity demand instead.
However, we think the most bullish forecasts don’t consider the challenges that utilities, regulators, and grid operators will face supplying the energy required to support new data centers.
Top energy constraints include:
- Developing new energy infrastructure typically requires multiple layers of regulatory approvals, which will determine how quickly utilities can raise the capital necessary to complete growth projects.
- Tight supply chains for large power generation and electrical equipment mean that large, greenfield data centers may have to wait at least three years for new energy supply.
- Utilities and grid operators must ensure grid reliability during peak demand periods before adding large data centers, possibly requiring additional infrastructure to meet that reliability standard.
- Data centers that aim to use clean energy will require investment in energy storage, gas generation, and grid upgrades.
Natural Disasters
Hurricanes and wildfires are reminders that natural disasters are a major operating and financial risk for all utilities. Yet history suggests natural disasters don’t always destroy shareholder value—a market overreaction can sometimes create buying opportunities.
- Hurricanes: Investors appear comfortable with the ability of most Southeastern utilities to handle severe weather and seek regulatory recovery of restoration costs. CenterPoint CNP was an exception to utilities successfully managing hurricanes’ impact in 2024, as Hurricane Beryl resulted inasmuch as an estimated $1.8 billion in restoration costs.
- Wildfires: Despite a relatively mild fire season last year, the 2025 Southern California wildfires may be an immediate concern—early damage estimates suggest the fires could be the most expensive wildfires in history. Utilities best positioned to have limited risk in this category usually serve areas in the Midwest, Southeast (excluding Florida), and mid-Atlantic.
Interest Rates
Interest rate expectations appear to have shifted again, affecting utilities in two ways. First, higher interest rates raise borrowing costs for utilities’ infrastructure investments, thus slowing earnings growth. As utilities continue to issue and refinance debt at higher costs, passing along those higher financing costs to customers will require regulatory sign-off for bill increases.
Higher interest rates also make utilities’ dividend yields less attractive. After a decade of historically high dividend yield premiums, the relationship has flipped in the last year. The current discount between utilities’ 3.3% dividend yield and 4.7% 10-year US Treasury yield is the largest since 2008.
Clean Energy
Solar is forecast to be the fastest-growing clean energy technology during the next decade because of falling costs, location flexibility, and reliability benefits. In the long term, structural drivers such as technological advancements, cost declines, and state renewable energy policies ensure the energy transition will continue.
Plus, state renewable energy standards are helping to drive renewable energy growth. Many states’ clean energy targets are fast approaching, and project development can take several years, making 2025 a critical year to prepare for 2028-30 deadlines.
Understanding the US Utilities Landscape
Overall, the US utilities sector is poised to grow in the coming years. Considering the rapid advancements in renewable energy and increasing regulatory pressures, it’s more important than ever for financial advisors to understand utilities industry trends over this period.
The Rise of Renewable Energy
One of the most significant shifts in the sector is the rapid growth of renewable energy sources. Over the past decade, falling costs for wind and solar projects and state-mandated renewable energy targets have spurred investments in clean energy. Renewable energy is now expected to surpass coal for the first time, making up over 16% of power generation.
Utilities must continue to innovate and invest in smart-grid technologies and battery storage to accommodate this growing influx of renewable energy. These advances will ensure grid reliability and efficiency as renewable energy’s share of the generation mix increases.
Revival of Electricity Demand Growth
Historically, US electricity demand has mirrored economic growth, averaging around 2% annually. However, since 2000, this relationship has weakened owing to improvements in energy efficiency and a decline in industrial electricity use.
Consequently, electricity demand has remained flat since 2007, but we’re likely on the cusp of a revival due to factors such as the proliferation of electric vehicles and the surge of data centers fueled by advancements in AI. As a result, we expect demand to grow 1% to 2% annually.
These factors represent important opportunities for utilities to expand their services and infrastructure to meet growing electricity needs. This includes utilities preparing for increased demand by investing in grid capacity, along with exploring partnerships with EV manufacturers to capitalize on the expanding EV market.
Utilities as Income Investment Proxies
Income-focused investors have long favored utilities because of their stable cash flows and high dividend payout ratios. Traditionally, utilities’ dividend yields closely tracked the yields of 10-year US Treasury bonds. However, following the 2008 financial crisis, utilities’ dividend yield premium peaked in mid-2020 as interest rates plummeted. With interest rates normalizing, we expect utilities’ dividend yields to align more closely with bond yields.
This makes utilities a defensive play for investors during economic downturns, offering steady returns even amid market volatility. Additionally, utilities’ focus on sustainable energy investments and grid modernization creates opportunities for long-term growth, further solidifying their appeal as income-generating assets.
How Utilities Deliver Value
The US utilities sector is undergoing a transformation driven by renewable energy expansion, increasing electricity demand, and stable investment returns. These utilities market trends and dynamics underscore the critical role utilities play in shaping the nation’s energy future.