Chart of the Week

We recently upgraded the Utilities equity sector from unfavorable to favorable as we believe it offers a unique combination of defensive and offensive traits. We believe that the sector may have the potential to hedge against further market volatility and downside economic risks and, as it is composed of primarily domestic businesses, should be less affected by tariff and currency risks. We also expect Utilities to benefit from the artificial-intelligence-related data-center buildout.

As the chart shows, consensus earnings-per-share (EPS) estimates for the Utilities sector have remained stable year to date. In contrast, EPS estimates for the S&P 500 Index as a whole and the Consumer Discretionary sector in particular, which we simultaneously downgraded to unfavorable, saw declines. This relative stability supports our favorable view.

Given our expectation for significant tariffs and tariff-related uncertainty well into the second half of 2025, we see an opportunity for investors to increase defensive equity sector exposure. During risk-on rallies, we prefer to reallocate from the cyclically oriented Consumer Discretionary sector, which we see as overvalued, to the more defensive Utilities sector, which we see as more favorably valued.

Forecasts are not guaranteed and based on certain assumptions and on views of market and economic conditions which are subject to change.

Each asset class has its own risk and return characteristics. The level of risk associated with a particular investment or asset class generally correlates with the level of return the investment or asset class might achieve. Stock markets, especially foreign markets, are volatile. Stock values may fluctuate in response to general economic and market conditions, the prospects of individual companies, and industry sectors.

Sector investing can be more volatile than investments that are broadly diversified over numerous sectors of the economy and will increase a portfolio’s vulnerability to any single economic, political, or regulatory development affecting the sector. This can result in greater price volatility. Risks associated with the Consumer Discretionary sector include, among others, apparel price deflation due to low-cost entries, high inventory levels and pressure from e-commerce players; reduction in traditional advertising dollars, increasing household debt levels that could limit consumer appetite for discretionary purchases, declining consumer acceptance of new product introductions, and geopolitical uncertainty that could affect consumer sentiment. Utilities are sensitive to changes in interest rates, and the securities within the sector can be volatile and may underperform in a slow economy.

S&P 500 Index is a market capitalization-weighted index composed of 500 widely held common stocks that is generally considered representative of the US stock market.

S&P 500 Consumer Discretionary Index comprises those companies included in the S&P 500 that are classified as members of the GICS® consumer discretionary sector.

S&P 500 Utilities Index comprises those companies included in the S&P 500 that are classified as members of the GICS utilities sector.

An index is unmanaged and not available for direct investment.

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