With the broader markets rising due to tax cut expectations, the defensives like utilities also had positive momentum last week. The SPDR S&P 500 (SPX-INDEX) (SPY) rose 1.6%, while the Utilities Select Sector SPDR S&P 500 (XLU) rose ~1% during this period. So far this year, utilities have gained more than 16% against broader markets’ rise of 17%.
Lower corporate income tax could have a significant impact on utilities. It would result in lower tax expenses and ultimately lower utilities’ rate recovery. Income tax is a key operating expense for utilities. The rates charged by utilities are calculated to recover these operating expenses with an additional rate of return on capital employed to offer those services.
Last week, the ten-year Treasury yields rose from 2.3% to 2.4%. Utility stocks and Treasury yields generally trade inversely to each other.
Leaders and laggards
The largest merchant power player, NRG Energy (NRG) stock fell nearly 4% and SCANA (SCG) stock rose 6% during the week. So far, SCANA is one of the biggest losers among the S&P 500 this year. It has lost 40% year-to-date. To learn more, read SCANA Shareholders’ Woes Got Magnified Recently.
In the next part, we’ll see what to expect from utilities in the near future.