Despite a strong rally recently this year, the utilities sector has a dual appeal: It offers investors both AI and defensive exposure “at undemanding valuations,” Goldman Sachs strategists said in a Wednesday note.
The sector has been outperforming recently, returning 16% over the past three months, putting it in the 98th percentile since 2002. According to Goldman, this increase is mainly due to valuation expansion rather than short-term earnings improvements.
In the note, the Wall Street firm highlighted that utilities trade at a price-to-earnings (P/E) ratio of 6% to equal weight, which is in line with historical averages. However, when adjusted for long-term growth, driven in part by AI-related energy demand, the sector’s PEG ratio is historically only in the 24th percentile.
“Our equity analysts remain above the 2026 EPS consensus, implying room for further positive revisions,” Goldman analysts wrote.
AI represents a key factor in the long-term growth prospects for utilities, Goldman notes, with the sector expected to benefit from increased energy demand associated with data centers and AI applications.
The company forecasts 2.4% annual growth in US energy demand between 2022 and 2030, compared to 0% over the past decade, fueled by a mix of ‘AI demand, ex-AI demand and a slowdown at the pace of energy efficiency gains’,” say strategists.
In turn, this expansion is poised to lead to higher capital expenditures among utilities, which, given that many companies are regulated entities, is necessary to generate additional profits.
Utilities also offer investors defensive exposure, which is particularly attractive in the current economic environment, with shares estimating real GDP growth of around 3.5%.
“This is broadly in line with the current economic environment, as GS Economics’ second-quarter GDP growth rate is 3.2% and the Atlanta Fed’s GDPNow estimate remains at 3.5%,” he said. Goldman Strategists.
“However, our economists expect real US GDP growth to gradually slow to around 2% in the coming quarters. This environment, or a less mild negative growth shock, would support holding defensive sectors such as utilities in the portfolio,” she added.
