Investors are bracing for a new wave of economic uncertainty as President Donald Trump imposes tariffs on major trading partners. A 20% tax on imports from China and a 25% levy on goods from Canada and Mexico have already sparked global retaliation. Now, Europe may be next in line.
Markets are feeling the heat. The S&P 500 has dropped 6% from its highs, while the Nasdaq Composite has plunged 9%. But amidst the turmoil, one sector is standing firm: utilities. Unlike tech and manufacturing stocks that rely heavily on global trade, utilities generate nearly all their revenue domestically, shielding them from foreign exchange swings and supply chain disruptions.
Markets React as Trade War Escalates
The numbers paint a stark picture. The Tax Foundation estimates that Trump’s tariffs will push the average tax on U.S. imports to 13.8%, the highest since 1939. For context, before these policies, the average was just 1.5%. Investors fear this could trigger a recession, as rising costs eat into corporate profits and force companies to raise prices or cut spending.
Wall Street’s response has been swift. The selloff in stocks suggests that traders aren’t convinced tariffs will boost domestic production in a meaningful way. Instead, they see higher consumer prices, slower economic growth, and possible Fed rate hikes to combat inflation.
One thing is clear: investors are searching for safe havens. And they may have found one in utilities.
Why Utility Stocks May Be a Safe Bet
Tariffs may hammer manufacturing and tech, but utilities are different. These companies provide essential services—electricity, water, and gas—that people need no matter what happens in the economy. That reliability makes them attractive during market turbulence.
Here’s why utilities could hold up better than other sectors:
- Limited foreign revenue exposure: Most utility companies earn less than 1% of their revenue from international markets. Compare that to tech, where global sales can make up more than half of total revenue. That means utilities won’t suffer from currency fluctuations or trade-related demand shocks.
- Stable earnings growth: Unlike cyclical industries, utilities have steady cash flows because consumers and businesses rely on their services regardless of economic conditions. In Q4, the sector posted earnings growth of 16%.
- Potential for increased demand: If tariffs slow imports and force more manufacturing to move back to the U.S., domestic energy consumption could rise. That benefits electric and gas utilities.
Vanguard Utilities ETF: A Defensive Play in a Volatile Market
For investors looking to add exposure to utilities, the Vanguard Utilities ETF (VPU) offers a straightforward option. It tracks 69 U.S. companies across the sector, with heavy weighting toward electric utilities (61%) and multi-utility companies (25%).
The ETF’s five largest holdings are:
| Company | Weight (%) |
|---|---|
| NextEra Energy | 11.2 |
| Constellation Energy | 7.1 |
| Southern Company | 7.1 |
| Duke Energy | 6.6 |
| Vistra | 4.4 |
One major draw? The fund’s low expense ratio of 0.09%, meaning investors pay just $9 annually for every $10,000 invested. While it has lagged behind the S&P 500 in recent years, the sector’s defensive nature and growing electricity demand could push returns higher.
The AI Boom Could Further Boost Utilities
Beyond tariffs, another trend could drive utility stocks higher: artificial intelligence. AI systems require massive amounts of computing power, and that means more electricity consumption. Goldman Sachs analysts predict power demand will accelerate “to levels not seen in 20+ years” as AI adoption spreads.
Already, data centers are straining the U.S. power grid. AI tools like ChatGPT consume 10 times more electricity per query than traditional search engines, increasing the burden on power providers. As cloud computing and AI expand, utilities stand to benefit from rising energy usage.
Balancing Risk and Opportunity
The utilities sector isn’t without risks. Higher interest rates could weigh on valuations, since utilities are often seen as bond proxies due to their stable dividends. And while they may outperform in the short term, technology stocks still hold stronger long-term growth potential.
That’s why some investors are playing both sides. Holding utilities as a defensive play while using tariff-driven dips to accumulate tech stocks could be a smart strategy. After all, while trade tensions are rattling markets now, innovation and AI could drive the next big rally.
