A Stock-Market Safe Haven Seen As ‘Canary In Coal Mine’ For Risk
Steadily climbing Treasury yields and a potential Federal Reserve rate hike are threatening to produce more rockiness for utilities, a group that traditionally was one of the stock market’s safest sectors before the AI trade changed the equation.
After starting 2026 with a surge of more than 11% through the end of February, utilities in the S&P 500 are now almost flat year-to-date for the second-worst performance among the 11 main industries in the benchmark index.
And if history is any indictor, a downturn in utilities could mean pain for the broader market as well. The Dow Jones Utility Average has topped out before the broader market in 21 of the last 30 bull-market peaks since 1930, Ed Clissold, chief US strategist at Ned Davis Research, wrote in an Aug. 24 note. Over those 21 instances, the stock market retreated more than 29% on average, he added.
“Utilities tend to be a canary in the coal mine because they are rate sensitive,” Clissold said in an interview. “Everybody seems to be so positive on everything right now, you don’t want to ignore the warning signs.”
The fact that utilities are flat in 2026 stands out in a year when the S&P 500 is sitting on a 13% gain, which means 2026 is shaping up to be the worst year for the group relative to the broader market since 2023.
The technical picture is grim: The percentage of stocks in the utilities sector that are trading above their 200-day moving averages, a technical indictor of a stock’s long-term price trend, is down to around 26%, the lowest level since February 2024.
The State Street Utilities Select Sector SPDR ETF is trading well below its 200-day moving average. That’s something it hasn’t done since a tariff-related equities selloff in April 2025. The second quarter marked the ETF’s biggest quarterly outflow since 2024.
“Weakness in utilities is a notable exception to the otherwise decent technical picture,” Clissold wrote in the note.
One of the biggest headwinds for utilities at the moment is rising Treasury yields, with the rate on 10-year US notes reaching nearly 4.80% on Tuesday, the highest since October 2023. Rising interest rates matter for stocks like utilities, which tend to be heavy borrowers. But more importantly, the rise in Treasury yields combined with a two-year 35% rally in utilities in 2024 and 2025 has done severe damage to the attractiveness of the stocks’ dividend yields, a source of income that — combined with recession-proof business models — has traditionally bolstered their reputation as a stock-market safe haven.
Rates on 10-year Treasuries are now about 1.84 percentage points higher than the dividend yield of S&P 500 utilities. The spread topped 2 percentage points in July, the widest since 2007, according to data compiled by Bloomberg.
There may be more pain for the group if the Fed hikes rates. In 1994, 1997 and 1999, utilities fell more than the rest of the market by a more than two-to one margin in the first month after rate hikes, said Sam Stovall, chief investment strategist at CFRA. Still, there’s no guarantee of further weakness: Since 2004, utilities have held up better and the group even rose 7.3% in 2022 after a hike while the S&P 500 only gained 0.8%, Stovall said.
Of course, while the spread is getting extreme, rates on 10-year Treasuries have been higher than S&P 500 utilities’ dividend yields since 2022, a period marked by growing exuberance for the AI trade — and growing predictions for the massive amounts of power that utilities will need to provide to data centers.
The concern is that earnings growth may have peaked for utilities as some begin trimming pipeline forecasts for AI data-center projects amid mounting opposition across the US, while also agreeing with regulators to lower returns on equity. Analysts expect earnings growth for S&P 500 utilities to slow in the coming quarters, from 14% in the second quarter to 5.9% in the current quarter, 12% in the fourth quarter and single-digits for the first three quarters of 2027.
So while the higher interest-rate environment is no friend to the utilities group, ultimately the direction of the AI trade may be what matters most.
“So much of the utility performance is being driven by those utilities tied into AI and power generation,” Stovall said.
This article was provided by Bloomberg News.
