Key Takeaways
- The utility sector continues to excel in 2026, propelled by demand from data centers and increasing capital expenditures.
- An extended multi-year rally has raised valuations, resulting in fewer options that are considered broadly cheap.
- Future gains will rely more on targeted stock selection as regulators focus on the issue of customer bill affordability.
Utilities are experiencing an unexpected rally as investors show increased interest in a sector traditionally recognized for stability rather than growth. The Morningstar US Utilities Index rose approximately 10% in 2026 by April 10, while the overall market remains relatively flat, according to the Morningstar US Market Index. In the past year, utility stocks increased by around 33%, outpacing the US market’s 27% growth. The sector has nearly doubled in total return since its low in October 2023, marking its best two-year performance in close to two decades.
This sustained rally signifies a change in investor perceptions of utilities. They are no longer merely regarded as low-growth dividend stocks akin to bonds; instead, the market is now rewarding these stocks due to rising electricity demands stemming from data centers, manufacturing, and electric vehicles, as well as the significant capital investment required to meet this demand.
Morningstar analysts Travis Miller and Andrew Bischof note that “earnings should keep growing, supporting utility returns,” suggesting that the next phase of returns will hinge more on stock selection rather than broader market trends.
Utilities Trade More on Growth Than Yield
A notable indicator of the sector’s changing profile is its current dividend yield, which stands at approximately 3%, as reported by Miller and Bischof. This represents a multi-decade low and is about one percentage point lower than the yield on US 10-year Treasuries. The diminished yield reflects the sector’s rally; as stock prices rise, dividend yields fall unless companies increase their dividend payouts.
This shift in yield is significant for a sector that has historically behaved as a bond substitute. Utilities have typically faced pressure from rising interest rates, as investors tend to seek income in Treasuries and other fixed-income alternatives. According to Miller and Bischof, “this marks a generational shift, as investors have started to value utilities’ growth more than their yield.” This focus on growth explains why utilities have performed well even in a high-interest-rate environment.
Data Centers Drive Utility Demand
The sector’s promising growth trajectory is primarily driven by increasing power requirements from data centers. Miller and Bischof highlight that “the data center infrastructure buildout remains a large driver for utilities growth over the next five years and beyond.” Following years of minimal growth, US electricity demand saw a 2.8% increase in 2025, with expected average growth of 1.4% per year through 2030. Commercial demand, particularly influenced by data centers, is climbing faster, boasting a 4.9% year-over-year increase.
Capital Expenditures Support Earnings Growth
Utilities are currently benefiting from one of the strongest investment cycles seen in years. Miller and Bischof observe, “Electricity demand growth, grid upgrades, and large investments that support earnings growth” as key factors. Morningstar anticipates a 6% rise in capital spending within the utilities sector in 2026, following a 12% increase in 2025. The Edison Electric Institute estimates capital expenditure will hit $1.1 trillion from 2025 to 2029, nearly on par with the previous decade’s $1.3 trillion.
Valuations Look Less Compelling After the Rally
While the favorable growth outlook has supported the sector’s rally, it has also made valuations increasingly significant. According to Miller and Bischof, the early-year rally has left few utilities with appealing valuations, as most stocks are trading at slight premiums to their fair value assessments. The median price/fair value ratio is currently about 1.07, indicating a 7% premium, up from 0.84 (16% discount) in October 2023.
Though there are still opportunities for investors, the sector no longer has the same valuation buffer it previously offered. The early 2026 rally “leaves few utilities with attractive valuations,” as concluded by the analysts.
Affordability Is a Key Risk
Beyond the issue of valuations, a critical concern is whether utilities can effectively manage growth initiatives while customer bills continue to rise. Miller and Bischof stress that “customer bill affordability is a major concern for utilities.” Regulatory endorsement is essential for recovering costs related to new generation, grid enhancements, and infrastructure for data centers.
Increasing residential power bills may lead regulators to resist approving significant rate hikes, particularly in states with higher costs. The ability of utilities to allocate additional infrastructure expenses to large-load customers, such as data centers, will be crucial for maintaining growth trajectories, according to Miller and Bischof.
Morningstar’s Top Utility Stocks
Alliant Energy
Alliant is strategically positioned for data center growth in Iowa and Wisconsin.
- Annual earnings growth is anticipated to be at the upper end of management’s guidance of 5%-7% through 2027, with over 7% growth projected for 2027 and beyond.
- The company’s $13.4 billion capital investment plan over four years aligns with this growth expectation.
- Alliant boasts four data center clients that support 3 GW of peak demand, contributing to an anticipated 11% annual sales growth from 2025-31.
- Three data center campuses are under construction, with a fourth already having a signed electric service agreement.
Duke Energy
Duke has experienced above-average growth alongside improving regulations.
- As a fully regulated utility, Duke is well-positioned to achieve the higher end of its target annual earnings growth of 5%-7%.
- The company’s $103 billion capital investment plan for 2025-30 is aimed at supporting load growth and necessary infrastructure upgrades.
- Duke enters 2026 with strong regulatory clarity, allowing for fast recovery of investments through customer ratemaking mechanisms.
Edison International
Positive regulatory developments support Edison’s growth, although wildfire risks are an ongoing concern.
- Management anticipates material losses from the recent Eaton fire but believes California’s AB 1054 legislation will limit shareholder losses.
- Investment of nearly $8 billion annually is expected over the next four years, mainly supported by recent regulatory approvals.
- This investment is projected to support 7% average annual earnings growth, aligning with management’s growth targets.
Portland General Electric
Investors seem to overlook Portland’s rapid growth in renewable energy and electricity demand.
- Investors may be overestimating the effects of regulatory challenges in Oregon, with recent favorable regulatory outcomes bolstering long-term growth investments.
- The state’s renewable energy requirements offer additional upside to Portland’s $7.6 billion investment plan, enhancing annual earnings growth prospects.
