Stocks have been struggling over the past few weeks as Fed officials have maintained their hawkish stance despite inflation showing a steady decline. The Nasdaq has declined 7.2% in the past three weeks, while the S&P 500 has seen its worst three-week decline of 4.6% since the Mar 10 week.

As concerns grow about more interest rate hikes, stocks have been scrambling to find direction. Although many are hopeful that the Fed won’t hike interest rates in its September FOMC, the central bank has kept itself open for more hikes in the near term.

Concerns Over Interest Rate Hikes Grow

The Fed had earlier indicated that it would require at least two more interest rate hikes of 25 basis points each this year. The first of the two was already announced in the July FOMC meet. A large number of market participants believe that the Fed may soon end its current monetary tightening cycle as inflation has been steadily declining.

Inflation has more than halved from a 40-year-high of 9.1% in June 2022. The consumer price index (CPI) rose 3.2% in July from 3% in June, which was also lower than the consensus estimate of 3.3%.

However, Fed officials remained hawkish in their July FOMC as they believe more rate hikes are required to ease inflationary pressures. Despite showing signs of cooling, inflation is still much higher than the Fed’s 2% target.

Most Federal Reserve officials hold the view that a slowdown in real GDP growth and a softening of labor market conditions are required to ease inflationary tensions. However, the present state of the economy indicates continued advancement, and the labor market remains resilient, with the unemployment level at multi-decade lows.

The Fed has hiked interest rates by 525 basis points since March 2022, taking its benchmark rate to the range of 5.25-5.5%. Further rates hikes will only make the situation more difficult because higher interest rates make the cost of borrowing expensive, restrict consumer spending and hamper economic growth. These factors could have an adverse impact on the stock market’s performance.

Given this situation, choosing to invest in utility stocks might be prudent. The utilities sector is known for its stability and maturity, as the demand for essential services tends to remain robust even amid shifts in the economic trajectory.

These companies provide critical services such as telecommunications, energy, gas and water, all of which maintain a consistent level of demand.

Also, most utilities belong to the category of low-beta stocks (beta greater than 0 but less than 1). Hence, the recommended approach is to invest in low-beta equities with a high dividend yield and a favorable Zacks Rank.

Our Choices

Entergy Corporation ETR is primarily engaged in electric power production and retail distribution of power. ETR has 30,000 megawatt (MW) of generating capacity, including more than 8,000 MW of nuclear fuel capacity.

Entergy Corporation has an expected earnings growth rate of 4.5% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.6% over the last 60 days. ETR currently has a Zacks Rank #2. Entergy Corporation has a beta of 0.64 and a current dividend yield of 4.48%.

Consolidated Water Co. Ltd. CWCO, along with its subsidiaries, is involved in the development and operation of seawater desalination plants and water distribution systems in areas where naturally occurring supplies of potable water are scarce or nonexistent. CWCO also focuses on expanding operations in areas with a large proportion of tourist properties and a growing population.

Consolidated Water Co. has an expected earnings growth rate of more than 100% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 36.1% over the last 60 days. CWCO presently carries a Zacks Rank #2. The company has a beta of 0.27 and a current dividend yield of 1.35%.

PNM Resources, Inc. PNM, through its subsidiaries, is engaged in distributing energy and energy-related businesses in the United States. PNM operates through two segments — Public Service Company of New Mexico and Texas-New Mexico Power Company.

PNM Resources has an expected earnings growth rate of 1.1% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.4% over the last 60 days. PNM presently has a Zacks Rank #2. PNM Resources has a beta of 0.41 and a current dividend yield of 3.3%.

Atmos Energy Corporation ATO, along with its subsidiaries, is engaged in the regulated natural gas distribution and storage business. ATO serves nearly 3.4 million customers in more than 1,400 communities in eight states, from the Blue Ridge Mountains in the East to the Rocky Mountains in the West. Atmos Energyoperates more than 72,000 miles of transmission and distribution lines as well as 5,700 miles of interstate pipelines.

Atmos Energy has an expected earnings growth rate of 8% for the current year. The Zacks Consensus Estimate for current-year earnings has improved 0.3% over the last 60 days. ATO presently has a Zacks Rank #2. Atmos Energy has a beta of 0.61 and a current dividend yield of 2.53%.
Entergy Corporation (ETR): Free Stock Analysis Report

Atmos Energy Corporation (ATO): Free Stock Analysis Report

PNM Resources, Inc. (PNM): Free Stock Analysis Report

Consolidated Water Co. Ltd. (CWCO): Free Stock Analysis Report

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