Are dangerous signals emerging in the US stock market? Under the pressure of high interest rates, "canary in the coal mine" utility stocks are the first to turn around, and historical trends suggest the broad market may face pressure.

The continuously rising U.S. Treasury yield and the potential interest rate hikes by the Federal Reserve are threatening to bring more volatility to utility stocks. Data shows that as of the end of February 2026, the utility sector in the S&P 500 had once increased by more than 11% since the beginning of the year. However, the sector's year-to-date gain has now nearly reverted to zero, ranking second to last among the 11 major sectors of the S&P 500. If historical data can serve as a reference, the decline in the utility sector may also suggest that the broader stock market will suffer. Ed Clissold, Chief U.S. Strategist at Ned Davis Research, noted in a report on August 24 that since 1930, in the last 30 market peaks, the Dow Jones Utility Average peaked 21 times before the broader market. He added that in those 21 instances, the stock market declined by an average of more than 29%. Ed Clissold stated, "Utilities often act like canaries in the coal mine because they are highly sensitive to interest rates. Right now, it seems everyone is incredibly optimistic about everything, and you don't want to ignore these warning signals." The fact that the utility sector has shown lackluster performance in 2026 is particularly striking, as the S&P 500 has accumulated a 13% gain. This indicates that relative to the broader market, 2026 is gradually becoming the worst year for this sector since 2023. From a technical perspective, the situation is also quite severe. The proportion of stocks in the utility sector that are trading above their 200-day moving average a technical indicator used to measure long-term price trends has dropped to about 26%, the lowest level since February 2024. The S&P 500 utility sector is displaying ominous signals The SPDR Utilities Select Sector ETF (XLU.US) is currently trading significantly below its 200-day moving average. This marks the first occurrence of this situation since April 2025, when market sell-offs related to tariffs impacted the ETF. Furthermore, in the second quarter, the ETF's net fund outflow reached the largest quarterly outflow since 2024. Ed Clissold commented in the report, "The weakness in the utility sector is a notable exception in an otherwise decent market technically." One of the biggest headwinds currently facing the utility sector is the rising U.S. Treasury yields. On Tuesday, the yield on the 10-year Treasury rose to nearly 4.80%, reaching its highest level since October 2023. Rising interest rates are particularly significant for utility stocks, which typically rely on substantial borrowing. More importantly, the increase in Treasury yields, coupled with a 35% rise in utility stocks over 2024 and 2025, has severely diminished the attractiveness of these stocks dividend yields. Dividend income combined with recession-resistant business models has traditionally been a crucial reason for utility stocks holding a "safe haven" reputation in the stock market. Currently, the 10-year U.S. Treasury yield is about 1.84 percentage points higher than the dividend yield of S&P 500 utilities. In July of this year, this yield spread briefly exceeded 2 percentage points, marking the largest gap since 2007. The yield spread between S&P 500 utilities dividend yield and Treasury yields has reached its lowest level since 2007. Of course, despite the current extreme level of this spread, the yield on the 10-year U.S. Treasury has been higher than the dividend yield of S&P 500 utilities since 2022. This period coincides with an increasing enthusiasm in the market for artificial intelligence (AI) trading, while there is also growing anticipation that utility companies will provide massive power supplies for data centers. On the other hand, if the Federal Reserve raises interest rates, the utility sector could face even more pain. Sam Stovall, Chief Investment Strategist at CFRA, noted that in the first month after the Fed raised rates in 1994, 1997, and 1999, the utility sectors declines were greater than other sectors and exceeded two times the average. However, Sam Stovall added that a further weakening of the utility sector is not a foregone conclusion since 2004, this sector has generally performed more robustly; even after the rate hikes in 2022, the utility sector rose by 7.3%, while the S&P 500 gained only 0.8%. It is noteworthy that the earnings growth of the utility sector may have peaked. With opposition voices growing across the U.S., some utility companies have begun to lower their pipeline forecasts for AI data center projects. At the same time, they are reaching agreements with regulators to lower their equity return rates. Analysts expect that the earnings growth rate for the S&P 500 utility sector will slow in the coming quarters from 14% in the second quarter to a current 5.9%, recover 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 favorable for the utility sector, ultimately, the direction of AI trading development may be the most critical factor. Sam Stovall remarked, "Much of the utility sector's performance has been driven by companies related to AI and the power generation business."