Utilities Sector Investment Opportunity Amid Shifting Yield Environment and Nuclear Energy Incentives

The U.S. utilities sector is positioned to benefit from a confluence of macroeconomic and regulatory tailwinds, including declining Treasury yields and state-level nuclear energy mandates. As utilities with nuclear expansion exposure gain momentum, investors are presented with a compelling opportunity to capitalize on defensive income streams and growth from clean energy infrastructure. Let's dissect the catalysts and explore actionable strategies.

The Yield Environment: A Tailwind for Utilities Valuations

The recent decline in the 10-year U.S. Treasury yield—from 4.58% at year-end 2024 to 4.23% by mid-2025—has created a favorable backdrop for utilities. Lower yields reduce borrowing costs for utilities, enabling them to expand capital projects at lower interest rates. Additionally, the sector's median dividend yield of 3.5% now appears more attractive relative to bonds, drawing income-seeking investors.

Utilities have outperformed the broader market this year, with the SPU returning 4.9% in Q1 2025 versus the S&P 500's -4.3%. This divergence highlights utilities' defensive appeal in a slowing economy and volatile equity markets.

State-Level Nuclear Mandates: A Policy Push for Growth

State legislatures are accelerating the adoption of nuclear energy, unlocking opportunities for utilities with nuclear assets or expansion plans. Key initiatives include:

• Colorado (HB25-1040): Nuclear energy is now classified as “clean,” unlocking public funding for projects.
• Indiana (SB 424): Streamlined approvals for small modular reactors (SMRs) reduce development timelines.
• Michigan: Tax credits and a $20M scholarship program for nuclear workers aim to bolster workforce capacity.
• Texas (HB 14): A $2B fund targets SMR deployment, driven by rising demand from data centers.

These policies create a regulatory “greenlight” for utilities to invest in nuclear infrastructure, which offers stable, 24/7 power generation—a critical asset as renewable adoption grows.

Oklo's Government Contract: A Catalyst for Advanced Nuclear

Oklo Inc.'s $200M+ contract to deploy a microreactor at Alaska's Eielson Air Force Base exemplifies the federal push for nuclear innovation. The Aurora reactor, capable of 1–50 MW output, addresses energy resilience in remote areas while aligning with Executive Order 14299, which prioritizes SMRs for national defense.

Oklo's project signals a broader trend: $500M in private investments (e.g., Amazon's backing of X-energy) and federal partnerships are scaling advanced nuclear technologies. Utilities with partnerships in this space, like Exelon (EXC) or Southern Co. (SO), could see valuation uplift as SMRs become mainstream.

Utilities to Watch: Nuclear Exposure and Rate Base Growth

Investors should focus on utilities with:
1. Existing nuclear assets (e.g., Dominion Energy (D), which operates 4 nuclear plants).
2. SMR partnerships or development pipelines (e.g., Entergy (ETR) with Nuscale).
3. Rate base growth from infrastructure investments. For instance, American Electric Power (AEP) forecasts 8.8% annual retail sales growth through 2027.

Utilities like Dominion offer a 17x 2025 P/E multiple, offering growth at a reasonable price. Their regulated business models ensure steady returns, even as the Fed's rate cuts (expected to total 100 basis points by year-end) further reduce financing costs.

Risks and Considerations

• Regulatory Delays: The Nuclear Regulatory Commission's (NRC) approval process for SMRs remains a hurdle. Oklo's project, pending NRC licensing, underscores this risk.
• Equity Raises: Utilities may issue shares to fund growth, diluting existing investors. Monitor capital structures closely.
• Demand Volatility: A severe economic slowdown could reduce electricity consumption, though utilities' regulated rate bases provide some insulation.

Investment Strategy: Prioritize Defensive Income and Nuclear Plays

• Core Holdings: Allocate to utilities with strong balance sheets and dividend histories, such as NextEra Energy (NEE) or Duke Energy (DUK).
• Growth Plays: Target firms with SMR partnerships or nuclear expansion plans, like Exelon or Oklo (via ETFs like NUCLEAR) until it goes public.
• Sector ETF: The Utilities Select Sector SPDR Fund (XLU) offers broad exposure, with a 3.4% yield.

Conclusion

The utilities sector is uniquely positioned to benefit from declining yields, state-level nuclear mandates, and federal funding for clean energy. With 5–7% earnings growth forecasted and a defensive dividend profile, utilities offer stability in an uncertain macroeconomic environment. Investors seeking income and exposure to infrastructure growth should overweight the sector, particularly in names with nuclear and SMR exposure.

The path forward is clear: utilities are not just a hedge against market volatility—they're a gateway to the energy transition.

As yields continue to drift lower, utilities' valuation story remains intact. Act now to secure a slice of this resilient sector.