Utilities are traditionally thought of as a defensive sector that attracts capital seeking a safe haven from broader market volatility that also pays a reliable dividend. Conventional market wisdom of market behavior advises us to never say 'this time is different' . Nvidia CEO Jensen Huang has said that we are at the start of a new industrial revolution, referring to the massive hardware and software buildout as we enter the age of artificial intelligence.
This new infrastructure requires a considerable amount of electricity to operate. According to a research report done by Goldman Sachs, a ChapGPT query requires about 10 times as much electricity as a Google search. As we look at the strength in the utilities within this context we might feel justified in saying this time might actually be different.
Before we go down this path, we must acknowledge the traditional intermarket relationship of utilities that tend to trade with an inverse relation to interest rates. If the view that yields have topped, capital will flow out of fixed income markets and into stable dividend payers. Yields likely topped in the fourth quarter of '23 and have trended lower as we're heading into our first rate cut in September.
Overlaid on the U.S. 10-year yield chart is the Utilities Select SPDR ETF (XLU) showing a clear inverse correlation that set the stage for a rally in utilities.
Now it's true that a move lower in yields set the stage for a broader rally in the stock market as shown in the S .