Are there any red flags surfacing in US stocks? Under the suppression of high interest rates, “coal mine canary” utility stocks took the lead in making a U-turn. Historical rules indicate that the market may be under pressure

The Zhitong Finance App learned that rising US Treasury yields and potential interest rate hikes by the Federal Reserve are threatening to bring more volatility to utility stocks. The data shows that since the beginning of 2026, the utilities sector in the S&P 500 index once rose by more than 11% by the end of February. Today, however, the sector's annual gains have almost returned to zero, ranking second to last among the 11 major industry sectors in the S&P 500 index.

If historical data can be used as a reference, the decline in the utilities sector could also mean that the wider stock market will suffer. Ed Clissold, chief US strategist at Ned Davis Research, wrote in an August 24 report that since 1930, out of 30 bull markets peaked, the Dow Jones Utility Average peaked 21 times earlier than the general market. He added that in these 21 cases, the stock market declined by an average of more than 29%.

“Utilities tend to be like canaries in coal mines because they are very sensitive to interest rates,” Ed Clissold said. “Everyone seems to be very optimistic about everything right now, and you don't want to ignore these warning signs.”

The fact that the utilities sector's performance was flat in 2026 is particularly prominent, as the S&P 500 index has now accumulated a 13% increase. This means that compared to the general market, 2026 is gradually becoming the sector's worst performing year since 2023.

From a technical point of view, the situation is also very serious. The proportion of stocks in the utilities sector that are above the 200-day moving average — the 200-day moving average is a technical indicator that measures long-term stock price trends — has fallen to about 26%, the lowest level since February 2024.

The S&P 500 utilities sector showed ominous signs

The SPDR Utility Select Industry Index ETF (XLU.US) is currently trading significantly below its 200-day moving average. This is the first time this ETF has experienced this since April 2025, which was affected by the tariff-related stock market sell-off. Furthermore, in the second quarter, the ETF's net outflow was the largest quarterly outflow since 2024. Ed Clissold wrote in the report: “The weakness in the utilities sector is a notable exception in a market where overall technical performance is acceptable.”

Currently, one of the biggest headwinds facing the utility sector is the rise in US Treasury yields. On Tuesday, the US 10-year Treasury yield rose to close to 4.80%, the highest level since October 2023. Higher interest rates are important for stocks such as utilities, which usually require significant borrowing.

But more importantly, the rise in treasury yields, combined with utility stocks rising 35% between 2024 and 2025, has seriously weakened the appeal of dividend yields in such stocks. And dividend income — combined with a recession-resistant business model — has traditionally been an important reason why utility stocks have earned their reputation as a “safe haven” in the stock market. Currently, 10-year US Treasury yields are about 1.84 percentage points higher than the S&P 500 utility sector dividend yield. In July of this year, the interest rate spread once exceeded 2 percentage points, the largest since 2007.

The spread between S&P 500 utility dividend yields and Treasury yields reached its lowest level since 2007

Of course, although this spread has now reached an extreme level, the 10-year US Treasury yield has been higher than the S&P 500 utility sector dividend yield since 2022. This period comes at a time when the market's enthusiasm for artificial intelligence (AI) transactions continues to heat up, and the market is increasingly predicting that utility companies will provide large-scale power supplies to data centers.

On the other hand, if the Federal Reserve raises interest rates, the utilities sector is likely to suffer even more. Sam Stovall, chief investment strategist at the CFRA, said that in 1994, 1997, and 1999, in the first month after the Federal Reserve raised interest rates, the utility sector fell more than in other market sectors and more than doubled.

However, Sam Stovall added that further weakening of the utilities sector is not a foregone conclusion — the sector's performance has been relatively stronger since 2004; even after the 2022 rate hike, the utilities sector has risen 7.3%, while the S&P 500 has only risen 0.8%.

It is worth mentioning that earnings growth in the utilities sector may have peaked. As opposition continues to rise across the US, some utilities have begun to lower their pipeline forecasts for AI data center projects. At the same time, they are also reaching agreements with regulators to lower their return on equity.

Analysts expect profit growth in the S&P 500 utilities sector to slow in the next few quarters — from 14% in the second quarter to 5.9% in the current quarter, then rebound to 12% in the fourth quarter, and maintain single-digit growth in the first three quarters of 2027.

Although the higher interest rate environment is not friendly to the utility sector, at the end of the day, the direction of AI transactions is probably the most important factor. Sam Stovall said, “Much of the utility sector's performance is driven by utility companies associated with AI and power generation businesses.”