Utilities 2023 Outlook: Is Boring Back?

Investors who bought and stashed utilities stocks should be quite happy as they dust off their portfolios. In the last 30 years, US utilities have returned an average 8.6% annually, posted double-digit returns in 18 of those years, and beaten the market in 12 of those years. In 2022, utilities outperformed the market by 21 percentage points, the most since 2000. But it's been a wild ride—since March 2020, utilities stocks have been more volatile than the market and 30% more volatile than the prior 25 years.

We think this dynamic is set to flip in 2023: Utilities are going back to boring. The jump in bond yields erased the yield premium that had lifted utilities' valuations to record highs. Less attractive yields will weigh on utilities' returns, making company fundamentals more important. Utilities' balance sheets are strong, dividends are well covered, regulation is improving, and environmental policy supports infrastructure growth. Investors who like boring should enjoy holding utilities in 2023.