When utilities stocks began to retreat in October, they lost out on topping technology as the best-performing sector in 2025. But US utilities still beat the market for the second consecutive year. The Morningstar US Utilities Index is up 70% from its low in October 2023, including dividends. Only the technology sector has performed better.
Valuations appear to be the biggest headwind for utilities going into 2026. Earnings growth remains strong, balance sheets are healthy, and dividends are secure. We think valuations climbed too high during the summer of 2025, but the late-year pullback has rightsized some of them. We consider the sector fairly valued as of late December. With utilities’ average dividend near historic lows at 3% and P/E multiples above long-term averages, these stocks will have to deliver the earnings growth we and the market expect. Low dividend yields provide little protection for investors if their growth prospects disappoint.
We expect 6.5% annual earnings growth for most utilities through 2030, based on secular trends such as clean energy growth, data center energy demand, manufacturing onshoring, and economy-wide electrification. Most utilities are planning for the most energy demand growth and capital investment over several generations. If this growth continues and utilities pull back some more, investors should be ready to buy.
Our near-term projections and the stocks’ investment plans suggest unprecedented earnings growth for most utilities in the next few years. But that comes with greater risk for investors accustomed to locking in a large share of their returns from utilities’ dividend yields. With dividend yields at historic lows and at a substantial discount to fixed-income alternatives, utilities must deliver on the market’s growth expectations to sustain elevated valuations. Utilities that fall short could face a sharp drop in their stock prices.
Top Utilities Sector Picks
Edison International
- Fair Value Estimate: $80.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
Investors’ overwhelming concern remains Edison’s EIX potential liabilities associated with the January 2025 Eaton Fire. The stock is down 25% since the fire, while the utilities sector is up 16%. Management has acknowledged that shareholders could face material losses, but it could be well into 2026 or beyond before there are any realistic loss estimates. Edison should have access to California’s $21 billion AB 1054 Wildfire Fund and the $18 billion expansion enacted in 2025 for future fire liabilities, resulting in minimal shareholder losses. Edison’s plan to invest $7 billion annually supports our 7% average annual earnings growth outlook. Management recently raised the dividend for the 22nd consecutive year.
Alliant Energy
- Fair Value Estimate: $71.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
We assume annual earnings growth at the high end of management’s 5%-7% guidance through 2027, accelerating growth beyond 2027. Alliant’s LNT four-year $13.4 billion capital investment plan is up 24% from its last four-year plan. Three data centers under construction and a fourth with a signed agreement total 3 gigawatts of demand, driving 12% annual sales growth in 2025-30. An additional 2 GW-4 GW could materialize beyond 2028. This plan is supported by constructive regulation across its operating subsidiaries. We expect management to continue to update the market on the 2 GW-4 GW of additional data center backlog throughout 2026.
Portland General Electric
- Fair Value Estimate: $54.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Low
We think investors are overestimating the impact of regulatory and policy uncertainties in Oregon, which has long been a challenging regulatory environment for utilities. However, recent regulatory reviews have been constructive, electricity demand from the technology sector is growing rapidly, and state renewable energy mandates offer plenty of growth investment. Portland General Electric POR management’s $6.4 billion investment plan for 2025-29 should drive annual earnings growth above 6%, with further upside if state regulators approve additional renewable energy projects in 2026.