UTILITIES

How Did The Once-Overlooked and Boring Utility Industry Become a Driving Force in The Market?

The wild meme stock moves of last week taught some investors a costly lesson: investing is boring, and it should stay that way. But one industry is proving that investing can be both boring and lucrative. Surging electricity demand has already boosted independent power producers and energy giants (yawn) — and now, it’s lifting another unlikely and boring beneficiary to record highs.

Keeping the lights on: The utility sector isn’t typically where traders dream of making their fortune — it’s considered stable. But in 2024, the utilities sector has been the fourth-best performer in the S&P 500. The Utilities Select Sector SPDR Fund ($XLU) is up 12.6% year-to-date (YTD), outpacing the S&P 500 and Nasdaq-100’s 11% returns.

• Optimistic electricity demand forecasts are helping utilities become a staple of popular AI trades — with a report by Grid Strategies LLC predicting that electricity demand could double over the next five years.

• Constellation Energy ($CEG), NextEra Energy ($NEE) and Public Service Enterprise GP ($PEG) are up 85%, 24%, and 21% YTD, respectively.

Recession signal?

In the first quarter, companies in the utilities sector grew their earnings per share by 30% — the the third-highest in the S&P 500. But rising electricity demand isn’t the only factor driving growth. Renewables, mass battery installations, and more efficient transmission lines have also boosted profits. However, strong returns in this industry haven’t always been good news for investors.

• Robinhood’s Stephanie Guild says that utilities tend to outperform in “low return environments” like recessions or bear markets.

• Luckily for investors, Guild says the industry’s current success is more of a result of its strong financial results, with Bespoke Investment Group’s Paul Hickey adding that the sector’s performance doesn’t represent “a big warning sign.”

Forward-looking: Mizuho analyst Anthony Crowdell notes that the utilities industry is still trading at a 12% discount from the S&P 500, despite the recent run. He believes the sector could continue to benefit from large power deals with big tech companies. On top of a 3% dividend yield, $XLU is trading at an 18x forward price-to-earnings (P/E) ratio, lower than the S&P 500’s 20.7x forward P/E. Crowdell’s top pick in the industry? NextEra Energy.

Read: The High Cost and Risk of Going Electric: Can America Keep Up with Electricity Demand?

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Bank of America’s Head of Commodities Research Think Gold Is Worth Its Weight

Gold prices have had a massive run over the past five years. In 2024, both gold and silver have outperformed the Nasdaq, Dow Jones & S&P 500 — and with interest rate cuts coming, Bank of America expects gold prices to soar past $3K in the next year.

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LARGECAP RECAP

🛢️Canada wildfires jeopardize oil production, threatening higher prices

If you thought Europe’s and the Middle East’s geopolitical issues were the only wild cards on your 2024 bingo, Canada would like a word. Western Canada is again on fire, battling over 100 wildfires thickening the air over North America. But a massive, uncontrolled blaze in Alberta threatens to endanger oil production in the world’s fourth-largest oil-producing country.

• Up to 80% of Canada’s oil, about 3.2M barrels a day, comes from the oil sands region — which could be affected or even shut down by a nearby wildfire.

• Energy consultancy Rystad warns that if the fires “materially worsen,” up to 2.1M barrels of daily output could be at risk, potentially taking more than 65% offline.

Bad for business: These fires could shake an already unstable oil market. Even if production isn’t halted, evacuations might impact Canada’s 6% share of global oil production. This could lead to higher prices in the US, Canada’s biggest oil buyer. While North America has managed to shield itself from the worst of the global crises with strong domestic production, Canada’s wildfires may have found their match.

Best Buy is the unlikely place to look for home runs: The big box retailer has a proven track record of placing bets on Technology products that dominate their market. Pay attention, because they just unveiled RYSE Smart Shades, a new smart-home product in 100+ stores with massive potential. Invest in RYSE before they become a household name →*

Markets & Economy

Robinhood ($HOOD) gets a double upgrade: Meme stocks have had a moment, and Bank of America analyst Craig Siegenthaler thinks the trading app will benefit from higher engagement and growth going into 2025-2026. [Read]

PIGS are flying: Once-struggling PIGS (Portugal, Italy, Greece, and Spain) are now seeing their economies and stock markets soar. Italy and Greece lead, rising 37% and 36%, respectively, surpassing the S&P 500. [Read]

Detroit records first population growth since 1957: As a concession for losing the No. 1 NBA draft pick (again), despite having the highest odds, Detroit finally got a win. But their population has still been down nearly two-thirds since the auto boom days of the ‘50s. [Read]

Business & Wealth

Lessons on building your portfolio: According to Morningstar, real estate, high-yield bonds, and crypto might not offer the portfolio diversification investors are looking for. [Read]

Money required to make friends: Real connections are harder to make these days, especially with less time spent in the office. Instead, people rely on gym memberships, art classes, and events to make connections. [Read]

Frontier Airlines ($ULCC) cancels change fees: In a W for consumers, the discount airline is changing its fee structure as the Biden administration targets junk fees. [Read]

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DIGIT OF THE DAY

Spending Is Rising Faster Among Those Earning Under $50K. Higher Wage Growth Is Helping.

Rounding errors for the rich have become their worst nightmare: spreadsheets filled with #REF errors. In recent weeks, consumer goods companies and restaurant chains have warned that earnings were hit by slower spending among low-income consumers. But Bank of America data shows a different story. In April, credit and debit card spending among those making under $50K rose 2.1% — outpacing the 1.3% change in those making over $50K.

• This data coincides with a deteriorating job market for higher earners — the wages of those making under $50K grew 4% in April, compared to just a 1% bump for those making over $125K.

• A BofA report from last July showed that US households making $125K+ receiving unemployment benefits had risen 60% from the previous year, compared to just 20% for those under $50K.

Catching up, but not fast enough: Per an Economy Policy Institute study released in March, the real wage growth for the bottom 10% of workers increased by 12.1% between 2019 and 2023. While still below the ~20% surge in overall inflation during the same period, this is the fastest growth for any income group. It’s hard to believe, but that’s the strongest growth since 1979.