What We're Seeing: Utilities Lead – 6 May 2024

The Week in Brief

Stocks extended their winning streak to three weeks. The S&P 500 gained again and was within roughly 1% of its all-time closing high. Investors largely shrugged off mixed earnings, choosing instead to focus on weak labour data that reinforced hopes for Fed rate cuts later in the summer.

The style rotation that began earlier in the spring continued. Value stocks outperformed growth, and small caps edged out large caps. This is a meaningful shift from the mega-cap dominated tape we saw for much of 2023.

The Utilities Surprise

The most striking sector action came from an unexpected corner: utilities. Typically a defensive, low-volatility sector, utilities ranked first for the third straight week. The driver is not defensive positioning but something more structural. AI-driven energy demand is changing the calculus for power companies.

Data centres require enormous amounts of electricity. As AI adoption accelerates, power demand is rising faster than many anticipated. Utilities with exposure to this theme, particularly those with generation capacity near major data centre hubs, are being repriced higher. This is a fascinating example of how technology trends can create winners in surprising places.

Fixed Income Quiet

The bond market was uneventful. The Bloomberg Aggregate was roughly flat as investors awaited upcoming inflation reports to gauge the path of yields. The Fed has signalled patience, and the market is taking that message to heart. Rate cut expectations have been pushed out, with September now looking like the earliest plausible window.

Technology shares pulled back modestly. Intel and others reported softer outlooks, tempering some of the enthusiasm around the sector. But the broader tech complex remains well-supported, and the pullbacks have been shallow.

Our Read

We find the utilities move instructive. It shows how quickly relative value can shift when new demand drivers emerge. The AI buildout is still in early innings, and the infrastructure required to support it, from chips to power to cooling, represents a multi-year investment cycle.

Our base case remains constructive on equities. The combination of resilient growth, moderating inflation, and eventual Fed easing is supportive. We are tilting toward sectors and styles that have lagged, including value and small caps, while maintaining exposure to quality growth names.

What Could Change Our View

The main risk is that inflation proves stickier than the market expects, forcing the Fed to delay cuts or even contemplate further hikes. The labour market data has been benign lately, but wage growth remains elevated. If services inflation reaccelerates, the soft landing narrative would come under pressure. We are watching the next few CPI prints closely.

This is informational commentary, not investment advice.