3 Top Utilities to Buy as Interest-Rate Buffers
With Kevin Warsh stepping in soon as Fed Chair, let's grade our top stock picks in the Utilities sector.
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On Wednesday, Kevin Warsh was officially nominated for the position of Chair of the Federal Reserve. Warsh’s term will begin in mid-May, when current Fed Chair Jerome Powell is slated to step down.
Warsh is considered an inflation hawk — someone who won’t hesitate to raise the Fed funds rate if inflation reignites. That’s not a problem Warsh is likely to face in the near term, as the current CPI inflation rate recently fell to 2.4% — its lowest level in nearly a year.
Warsh will preside over the Federal Open Market Committee (FOMC) meeting scheduled for June 17. According to the CME’s FedWatch Tool, there’s a 33% chance that Warsh will cut rates at that meeting, and a 47% chance of a rate cut by the July meeting.
Why will this inflation hawk cut rates so early into his term? Just as annual CPI inflation slowed to 2.4% in January of this year, GDP growth is also slowing, to just 1.4% in the fourth quarter of 2025.
Not factored into recent CPI and GDP figures is the current conflagration in the Middle East. A critical shipping lane, the Strait of Hormuz, has seen a sharp decrease in traffic. Over 20,000 flights have been canceled. Higher energy prices will likely weigh on the global economy, further depressing GDP.
Navigating the Landscape
How can investors navigate this market landscape? One way is through utilities stocks.
Over the past month, the State Street Utilities Select SPDR (XLU) , a bellwether for the sector, has gained nearly 11%. In doing so, XLU has broken out to reach a new all-time high (point A).
Which individual names in the utilities sector are currently the most attractive? We chose three to create a basket:
Duke Energy
North Carolina-based Duke Energy (DUK) has a current yield of 3.23%,and closed at an all-time high of $131.88 on Wednesday. The stock’s 50-day moving average (blue) recently crossed above its 200-day moving average (red), a bullish momentum indicator.
GRADE: A-
The Southern Company
Although it hasn’t yet reached a new high, The Southern Company (SO) is on a similar trajectory as Duke Energy. This utility has a current yield of 3.03%.
GRADE: B
Consolidated Edison
Consolidated Edison (ED) reached a new all-time high last month, after reporting solid earnings and revenues for its recently-ended fourth quarter. This stock boasts a current yield of 3.16%.
GRADE: B
Bottom Line
Our base-case scenario assumes that GDP will continue to slow, and CPI will continue to slide, pushing interest rates lower. That’s good news for stocks, especially utilities, which sometimes trade in a fashion similar to fixed-income instruments.
When the markets no longer perceive that rates have further to drop, the trade will end.
At the time of publication, Ponsi was long DUK, SO and ED.
