Utility Stocks 2025 Outlook: Back to Normal?

Utilities investors had a rocking time in 2024. Utility stocks were up 27%, including dividends, tying for the sector’s best performance since 2000. Before a December pullback, widely held names like NextEra Energy NEE, Dominion D, Southern Company SO, and Entergy ETR were up 40% or more from their late-2023 lows. Vistra’s VST stock quadrupled, nearly leading the S&P 500.

That 2024 rally erased the sector’s 2023 woes, leaving these stocks fairly valued on average. Excitement around lower interest rates has ebbed, and we think valuations fully reflect AI-related energy demand growth potential. Data center delays, an inflation rebound, and regulatory pushback on customer rate increases are risks. Despite beating the market in two of the last three years, utilities’ 7% average return since 2021 matches their 40-year average. We think this is a good benchmark for investor expectations in 2025.

Key Themes and Questions for the Utilities Stock Outlook:

• Data Centers: The AI craze partly powered utilities’ market-beating returns in 2024. In 2025, we should find out which utilities can turn data center excitement into tangible earnings growth. Will new nuclear power be part of the power supply solution?
• Natural Disasters: Recent wildfires and hurricanes are reminders that natural disasters are a key risk for utilities and shareholders. Watch for more regulatory discussions about mitigating disaster risk.
• Interest Rates: Higher-for-longer interest rate forecasts sunk utilities in 2023. Easing inflation boosted utilities in 2024. A more stable rate policy outlook cooled valuations in the fourth quarter. Can utilities' fundamental growth reduce sensitivity to swings in interest rate policy expectations?
• Clean Energy: Many states' clean energy targets are fast approaching. Project development can take several years, making 2025 a critical year to prepare for 2028-30 deadlines. Will politics slow growth? Will utilities show more urgency?

Duke Energy

Key 2025 Activity: Q1 capital refresh, regulatory storm recovery progress

Duke is a fully regulated utility with a clear pathway to achieving management’s 5%-7% annual earnings growth target. Duke’s $73 billion capital investment plan for 2024-28 is focused on clean energy and infrastructure upgrades as the company works toward its net-zero carbon emissions goal by 2050. We don’t think the market appreciates the upside to Duke’s capital plan and additional electricity demand growth from data centers. In North Carolina, Duke’s most important jurisdiction, regulation has improved significantly due to recently passed legislation. A recent outcome in South Carolina is also a significant improvement. Duke’s 3.9% yield is among the highest in the sector.

Evergy

Key 2025 Activity: Data center development, regulatory activity in Kansas

Evergy’s electricity demand growth and capital investment outlook have jumped in the last year, but we think the market still doesn’t appreciate the upside to earnings growth. Alphabet GOOGL/GOOG, Meta Platforms META, and Panasonic PCRFF have proposed projects in Evergy’s region, part of a pipeline of industrial development that represents as much as 60% of Evergy’s total system demand. If even a few of those projects materialize, we expect earnings can grow 6% annually at least through 2028, at the high end of management’s 4%-6% target. Constructive regulatory developments in Kansas could boost earned returns and earnings growth by late 2025.

Eversource Energy

Key 2025 Activity: Mending Connecticut regulatory relations, executing in Massachusetts

We think Eversource is too cheap for investors to ignore, trading at a 12 P/E ratio and 5% dividend yield. Eversource will miss out on most of the data center growth excitement, given its northeast service territory, but it has plenty of investment opportunities to keep earnings growing 6% annually, at least through 2028. We think the market is ignoring this growth. It has mostly eliminated its offshore wind exposure and will derive all its earnings from its rate-regulated utilities in 2025. We think Eversource can offset regulatory challenges in Connecticut by adding projects in Massachusetts, where regulation is more constructive.

WEC Energy Group

Key 2025 Activity: Wisconsin economic activity, ongoing regulatory developments in Illinois

WEC Energy combines best-in-class management with above-average growth opportunities, supported by constructive regulation across most jurisdictions. The company increased and updated its capital plans to spend $28 billion through 2029, a $4.3 billion increase from its prior five-year program. Regulators recently maintained the Wisconsin utilities’ 9.8% allowed return on equity, allaying investor concerns regarding regulatory constructiveness and supporting significant economic development in the region. WEC Energy’s capital investment plan supports our expectation for the company to exceed management’s 6.5%-7% earnings growth guidance, which we don’t think the market appreciates.