Elevated US Treasury yields and the prospect of additional Federal Reserve rate hikes are setting the stage for heightened turbulence in the utilities sector. Data shows that after surging more than 11% earlier in 2026 through the end of February, the utilities group within the S&P 500 has now erased nearly all of those gains, ranking second-worst among the index's 11 major sectors for the year.

Historical patterns suggest that weakness in utilities could foreshadow broader equity market distress. According to Ed Clissold, chief US strategist at Ned Davis Research, the Dow Jones Utilities Average peaked ahead of the broader market in 21 of the past 30 bull market tops since 1930. In those 21 instances, the stock market subsequently declined by an average of more than 29%. Clissold noted that utilities often act as a canary in the coal mine due to their acute sensitivity to interest rates, adding that with widespread optimism prevailing, these warning signals should not be dismissed.

The flat performance of utilities in 2026 stands out particularly because the S&P 500 has climbed 13% during the same period. This divergence is on track to make this year the worst relative performance for the sector since 2023. Technical indicators also paint a grim picture, with the percentage of utility stocks trading above their 200-day moving average falling to roughly 26%, the lowest level since February 2024.

The SPDR Utilities Select Sector ETF (XLU.US) is now trading notably below its 200-day moving average, marking the first time this has occurred since the tariff-related selloff in April 2025. Additionally, the second quarter witnessed the largest quarterly net outflows from this ETF since 2024. Clissold described the sector's softness as a notable exception in a market where overall technicals remain respectable.

One of the primary headwinds facing utilities is the surge in US Treasury yields. On Tuesday, the 10-year Treasury yield approached 4.80%, its highest level since October 2023. Rising interest rates carry significant weight for companies like utilities that typically require substantial borrowing. More critically, higher yields compounded with a 35% rally in utility stocks over 2024 and 2025 have diminished the appeal of their dividend yields.

Dividend income, combined with defensive business models, has traditionally been the foundation of utilities' reputation as a stock market safe haven. Currently, the 10-year Treasury yield exceeds the dividend yield of S&P 500 utilities by about 1.84 percentage points. This spread surpassed 2 percentage points in July, marking the widest gap since 2007. Although this differential has reached extreme levels, the 10-year Treasury yield has consistently exceeded utility dividend yields since 2022, a period coinciding with surging enthusiasm for artificial intelligence trades and growing expectations that utility companies would supply massive amounts of power to data centers.

Should the Fed opt to raise rates, utilities could face further pain. Sam Stovall, chief investment strategist at CFRA, pointed out that in 1994, 1997, and 1999, utilities fell more than twice as much as other market sectors in the first month following Fed rate hikes. However, Stovall cautioned that further weakness is not guaranteed, noting the sector has shown relative resilience since 2004. Following the 2022 rate hike cycle, utilities actually advanced 7.3% while the S&P 500 gained a mere 0.8%.

Earnings growth for utilities may have already peaked. With rising opposition across the country, some utility companies have begun lowering their pipeline forecasts for AI data center projects. Concurrently, they are reaching agreements with regulators to reduce return on equity. Analysts anticipate that earnings growth for S&P 500 utilities will decelerate over the coming quarters, dropping from 14% in the second quarter to 5.9% in the current quarter, recovering to 12% in the fourth quarter, before settling into single-digit growth through the first three quarters of 2027.

While the higher rate environment poses challenges for utilities, the trajectory of the AI trade may ultimately prove more decisive. Stovall emphasized that much of the sector's performance is driven by those utility companies tied to AI and power generation businesses.