Utilities Outlook US 9.30.26

October 5, 2026 Gabelli Funds 249 Royal Palm Way Palm Beach, FL 33480 Tel (

The Storm Before the Calm? Todays Headwinds--Tomorrows Tailwinds? EPS Growth Remains Strong Despite Higher Interest Rates

Timothy M. Winter, CFA ( ©Gabelli Funds 2026

Gabelli Funds October 5, 2026 249 Royal Palm Way Palm Beach, FL 33480 Tel (

US Utilities- Today’s Headwinds Could Become Tomorrow’s Tailwinds

Utilities were hit hard in the third quarter, declining 13% versus a 2.0% gain for the S&P 500, leaving the S&P Utilities Index (SPSU) down 7.6% year-to-date. After rallying 12% to a record high in late February, utilities gave back those gains and more as the Iran conflict drove oil prices higher, increased inflation concerns and pushed the 10-year Treasury yield above 5.3% for the first time since 2002. The US interest-rate outlook reversed quickly, as expectations for Fed easing gave way to higher-for- longer rates amid resilient economic growth and accelerating AI investment. Political and regulatory pressures have added to the weakness as the November elections intensify the focus on utility affordability and opposition to data-center development.

Table 1 First Nine-Months 2026 Performance As of 9/30/ -QTR 2-QTR 1-QTR YTD Total Total Total Return Return Return Return Return Return Return

S&P 500 Utilities - 7.6% - 13.0% 0.6% 8.3% 16.0% 23.4% - 7.1% DJ Utility Average - PHLX Utility Sector - S&P 500 Index -Year Treasury Yield (Beginning of Period) -Year Treasury Yield (End of Period) Source: Thomson One

We attribute the third-quarter selloff primarily to higher interest rates rather than deteriorating fundamentals. Higher borrowing costs and lower stock valuations make financing less attractive, but authorized ROEs generally adjust to higher rates with a regulatory lag. Despite these pressures, many utilities continue to target 6–8% or better annual EPS growth as data centers, manufacturing and electrification accelerate demand. Electric utilities plan to invest nearly $1 trillion over the next three years, supporting strong rate base growth and one of the largest infrastructure investment cycles in decades.

While proposed data-center capacity far exceeds what will ultimately be built, projects backed by well-capitalized hyperscalers should provide substantial support for utility earnings growth. Growing opposition over affordability, water consumption, land use and reliability is delaying some projects, but large-load tariffs and electric service agreements increasingly require developers to fund infrastructure costs and protect existing customers. Growth will be uneven across regions and utilities, favoring those with available power, constructive regulation, efficient permitting and the ability to rapidly expand generation and transmission. Texas, Virginia, Louisiana, Ohio, Iowa, Missouri and much of the Midwest and Southeast remain important development markets despite increasing scrutiny.

Scale and access to capital have also become even more important. Larger utilities with the financial resources, generation portfolios and speed-to-market capabilities to serve rapidly growing loads are increasingly targeting high-single-digit EPS growth versus mid-single-digit growth for more traditional utilities. The proposed NextEra Energy-Dominion Energy (announced 5/18/2026) combination highlights the importance of scale, while private infrastructure capital continues to pursue power assets, supporting additional transactions and consolidation.

We expect third quarter earnings season to refocus investors on accelerating power demand, record capital investment and strong rate base growth. Despite higher interest rates and affordability pressures, we expect utilities to grow EPS at historically high rates through 2032. Regulation remains broadly constructive, supporting increased capital investment that requires strong balance sheets and balanced financing. We view growing equity needs as accretive to earnings. At 16.5x 2027 earnings and a relative P/E discount to the S&P 500, valuations appear attractive. We see potential annual total returns of 9–11%, including a 3.5% dividend yield and ~7% EPS growth. We believe recent weakness reflects macroeconomic and…