If you were asked at the beginning of 2024 to imagine the top sectors of the S&P 500 for the first four months of the year, you'd likely have pegged technology and consumer services as the frontrunners, leaving others far behind.

If someone had told you that utilities, the underperformers of 2023 with a 7% drop, would outperform the tech sector, you'd probably have thought they were pulling your leg.

Against all odds, here we are. Since the start of the year, tech is now up 2.6%, while utilities surged over 8%.

Amid market pullbacks over the past month, utilities emerged as the unlikely victors, defying the prevailing trend and surging in year-to-date performance rankings against tech stocks.

While the tech sector dipped by nearly 5% in the last month, utilities rallied by about 4%, showcasing a remarkable rebound.

It's akin to the adage: "When the going gets tough, the tough get going."

Back in 2022, amid Fed Chair Jerome Powell's aggressive interest rate hikes, utilities stood as the lone survivor in the market bloodbath, apart from the exceptional performance of the energy sector. In that year, technology endured a 27% loss, and communication services suffered a staggering 37% decline.

Performance of S&P 500's Sectors: Last Month, Full-Year 2023 and 2022

Why Are Utilities Rallying?

The utilities rally over the last month has been widespread, with 28 out of 30 components of the XLU ETF showing positive performance.

Notably, utilities have perfectly embodied their defensive role, characterized by companies with stable and predictable cash flows, which become increasingly attractive to investors amid uncertainty elsewhere.

Following a string of higher-than-expected inflation data and after the 2-year Treasury yields surpassed a 5% yield, markets approached the May 1 Federal Reserve meeting with a heightened fear of a hawkish shift.

However, this scenario did not materialize, with Powell dispelling fears of an interest rate hike, though also indicating that rate cuts are not in scope at this stage.

In a limbo where uncertainty over monetary policy reigns supreme – investment banks' forecasts range from 1 to 4 interest rate cuts by year-end – and where the market seeks greater clarity on the latest inflation dynamics, defensive sectors like utilities regain favor.

Stocks Driving The Sector Rally

There haven't been any staggering performances in the sector, but rather a general upward trend that lifted all boats in the XLU ETF.

Here are the top performers over the last month:

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Image generated using artificial intelligence via Midjourney.