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Goldman Sachs declares that utility stocks provide exposure to AI and serve as a hedge against a slowing economy at an attractive price

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According to Goldman Sachs, utility stocks are a good investment option for those looking to gain exposure to the artificial intelligence trend and for those looking to hedge against a slowing economy. Despite a recent rally that has seen utilities become the best performing sector in the S & P 500, they still remain relatively affordable. The sector has a price-to-earnings premium of just 6% compared to the equal-weight S & P 500, which is in line with historical averages. This makes utilities an attractive option for investors looking for both growth and defensive exposure at reasonable valuations.

The long-term growth prospects for the utilities sector are improving due to rising electricity demand from data centers and AI. The utilities’ capital expenditures are expected to increase by roughly 36% over the next three years, signaling a positive outlook for the sector. Goldman is forecasting above-consensus earnings growth for the 16 utility stocks it covers, with companies like NextEra, Xcel Energy, Sempra, and Southern Company offering the best exposure to the data center power demand surge among Goldman’s buy-rated stocks.

In addition to offering exposure to the AI trend, utilities also serve as a defensive option against a slowing economy. With Goldman predicting a slowdown in U.S. economic growth in the coming quarters, owning defensive industries such as utilities can help protect a portfolio from negative growth shocks. However, interest rates could pose a potential headwind for the sector. Utilities typically underperform when bond yields rise, as higher rates raise borrowing costs and make dividend yields less attractive compared to risk-free Treasury yields. While the Federal Reserve has indicated that interest rate hikes are not imminent, a return to a rising bond yield environment could weigh on the performance of utilities.

Overall, utility stocks present a compelling investment opportunity for investors looking for a balance of growth and defensive exposure in their portfolios. With the AI trend driving increasing electricity demand and utilities’ capital expenditures on the rise, the sector is poised for long-term growth. Despite a recent rally, utility stocks remain relatively affordable, making them an attractive option for a variety of investors. However, potential headwinds from rising interest rates could impact the sector’s performance, so investors should keep a close eye on market conditions and adjust their strategies accordingly.

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