US Utilities Market Trends for 2025

The utilities sector has experienced a rollercoaster of performance in the past. Still, utilities are now playing a defensive role amid recent economic and market uncertainty. Despite tariffs and other macroeconomic concerns, most US utilities continue to plan for their largest capital investment growth cycle in decades.

Given the evolving sector, financial advisors must stay informed on key trends to initiate valuable conversations and support clients. Here’s what to know about this evolving sector.

Utilities continue to outperform nearly all sectors and the market. As of late August, the Morningstar US Utilities Index is up 19% in 2025 and 71% from its bottom in October 2023, including dividends. Only the technology sector has performed better.

Our Q3 2025 US Utilities Sector report finds that most US utilities are trading at premiums to our fair value estimates as of late August—and utilities stocks keep climbing even as interest rates remain at multidecade highs.

While past performance has varied, our 2025 outlook report suggests this year may bring new opportunities and challenges for utilities. Excitement around lower interest rates has ebbed and our analysts believe valuations fully reflect AI-related energy demand growth potential. But risks include data center delays, an inflation rebound, and regulatory pushback on customer rate increases.

The AI craze helped power utilities' market-beating returns last year. Although our base case assumes data center electricity demand will represent 3% of US electricity demand, the outlook is trending toward our bull-case scenario—which has it more than doubling by 2032 and representing 4.5% of total US electricity demand instead.

However, we think the most bullish forecasts don't consider the challenges that utilities, regulators, and grid operators will face supplying the energy required to support new data centers.

Top energy constraints include:

• Developing new energy infrastructure typically requires multiple layers of regulatory approvals, which will determine how quickly utilities can raise the capital necessary to complete growth projects.

• Tight supply chains for large power generation and electrical equipment mean large, greenfield data centers may have to wait at least three years for new energy supply.

• Utilities and grid operators must ensure grid reliability during peak demand periods before adding large data centers, possibly requiring additional infrastructure to meet that reliability standard.

• Data centers that aim to use clean energy will require investment in energy storage, gas generation, and grid upgrades.

Hurricanes and wildfires are reminders that natural disasters are a major operating and financial risk for all utilities. Yet history suggests natural disasters don’t always destroy shareholder value—a market overreaction can sometimes create buying opportunities.

• Hurricanes: Investors appear comfortable with the ability of most southeastern utilities to handle severe weather and seek regulatory recovery of restoration costs. CenterPoint (CNP) was an exception to utilities successfully managing hurricanes' impact in 2024 while Hurricane Beryl resulted in as much as an estimated $1.8 billion in restoration costs.

• Wildfires: Despite a relatively mild fire season last year, the 2025 southern California wildfires may be an immediate concern—early damage estimates suggest the fires could be the most expensive wildfires in history. Utilities best positioned to have limited risk in this category usually serve areas in the Midwest, Southeast (excluding Florida), and mid-Atlantic.

Rising interest rates during the last few years have made utilities' dividend yields less attractive. After a decade of historically high dividend yield premiums, the relationship has flipped. In 2023, the 10-year US Treasury yield climbed above the utilities’ average dividend yield near 3% for the first time since the 2008 financial crisis. Even if interest rates fall, utilities’ dividend yields would have to rise substantially to close their current discount to interest rates.

Solar is forecasted to be the fastest-growing clean energy technology during the next decade due to falling costs, location flexibility, and reliability benefits. In the long term, structural drivers such as technological advancements, cost declines, and state renewable energy policies ensure the energy transition will continue.

Plus, state renewable energy standards are helping to drive renewable energy growth. Many states' clean energy targets are fast approaching, and project development can take several years—making 2025 a critical year to prepare for 2028-30 deadlines.

Overall, utilities are central to the energy system. Our 2025 landscape report finds that the industry is poised to grow in the coming years. Considering the rapid advancements in renewable energy and increasing regulatory pressures, it’s more important than ever for financial advisors to understand key trends over this period.

One of the most significant shifts in the sector is the rapid growth of renewable energy sources. During the last decade, falling project costs and state renewable energy requirements have jumpstarted investments in clean energy. Renewable energy is now expected to surpass coal for the first time, making up over 16% of power generation. We believe renewable energy growth will accelerate as costs continue to decline and state requirements stiffen—with solar positioned to grow the fastest.

Utilities must continue to innovate and invest in smart-grid technologies and battery storage to accommodate this growing influx of renewable energy. These advances will ensure grid reliability and efficiency as renewable energy's share of the generation mix increases.

Historically, US electricity demand has mirrored economic growth, averaging around 2% annually. But since 2000, this relationship has weakened due to improvements in energy efficiency and a decline in industrial electricity use.

Consequently, electricity demand has remained flat since 2007—but we’re likely on the cusp of a revival due to factors such as the proliferation of electric vehicles (EVs), shrinking marginal energy efficiency gains, and new data centers fueled by advancements in AI. As a result, we expect demand to grow 1-2% annually.

These factors represent important opportunities for utilities to expand their services and infrastructure to meet growing electricity needs. This includes utilities preparing for increased demand by investing in grid capacity along with exploring partnerships with EV manufacturers to capitalize on the expanding EV market.

Income-focused investors have long favored utilities due to their stable cash flows and high dividend payout ratios. Traditionally, utilities' dividend yields closely tracked the yields of 10-year US Treasury bonds. However, following the 2008 financial crisis, utilities' dividend yield premium peaked in mid-2020 as interest rates plummeted. Utilities’ dividend yields have been below the 10-year US Treasury yield since 2022, one of the longest periods in 30 years.

This makes utilities a defensive play for investors during economic downturns, offering steady returns even amidst market volatility. Additionally, utilities' focus on sustainable energy investments and grid modernization creates opportunities for long-term growth, further solidifying their appeal as income-generating assets.

The US utilities sector is undergoing a transformation driven by renewable energy expansion, increasing electricity demand, and stable investment returns. These utilities market trends and dynamics underscore the critical role utilities play in shaping the nation's energy future.

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