By Jacob Sonenshine

Safety seekers should look to utility stocks as the stock market tries to figure out just where it might go next.

The S&P 500 index has suffered losses of 11% this year amid concern about the economic damage President Donald Trump's tariffs are likely to cause. Utility stocks have been dragged down too -- the Utilities Select Sector SPDR exchange-traded fund (ticker: XLU) is off 1.3%, including a large drop in the past few weeks -- but they tend to hold up better than most stocks during a decline because people always need electricity.

The reality is that investors are paying lower price/earnings multiples across the board, including for utilities.

The drop in P/Es leaves utilities trading cheaply. The ETF trades at about 17 times the aggregate earnings that analysts covering its companies expect for 2025, according to FactSet. That's down from just over 18 on Feb. 19. True, the fund was at a steeper discount versus the S&P 500 before the selling began, but it's still 1.5 points below the S&P 500's multiple. That's cheaper than a long-term average of a roughly 0.9-point discount, according to Mizuho Securities analyst Anthony Crowdell.

If the fund's multiple doesn't drop much from here, it could post gains, even if the rest of the market remains volatile. Analysts expect the group's earnings to grow just over 7% every year for the next three years.

Driving the growth is the fact these companies are creating new, clean energy plants faster than they're retiring older ones. As their asset bases rise, their earnings grow too because they're allowed to earn a certain rate of return on their investments by the states they operate in. Over time, utility companies lift the rates they charge customers to bring their earnings higher. Sometimes states rule that they can't lift the rate they charge as much as the market anticipates, but over time, rates tend to move higher.

A case in point: Consolidated Edison in February requested a return on book value from New York state that would imply an increase in its prices of just over 12%. Crowdell believes New York will rule favorably, and the stock has rallied 14% since the request. Shares recently hit a record high, so it might not be the best utility to buy now, but it demonstrates the thesis for a stable utility provider.

We prefer American Electric Power, which is cheaper and has growth ahead. It's trading at 17 times earnings, and analysts expect the company, which serves many states across the Southeast and Midwest, to increase its "rate base," or the total value of its assets, by 6.5% annually over the coming four years to $87.6 billion by 2028, and it just sold stock to make sure that's possible.

A heavy jolt of electricity might just be what every portfolio needs.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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April 10, 2025 13:12 ET (17:12 GMT)

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