Goldman: Falling rates will drive outperformance in this group of stocks

In a note to clients Wednesday, analysts at Goldman Sachs predict a period of outperformance for utilities and green energy stocks, fueled by an anticipated drop in interest rates and rising power demand.

Their note highlights how these sectors have lagged the broader market in recent years, attributing this mainly to rising borrowing costs.

An imminent rate cut by the European Central Bank (ECB) this week, according to Goldman Sachs economists, could be the catalyst for a new cycle of falling rates. This, combined with an expected inflection point in power demand, could lead to a "major tailwind for utilities."

Goldman Sachs analysis shows that, over the past decade, periods of falling rates have historically turned utilities into a top-performing sector.

Their research indicates that even a modest decline in rates could trigger a notable upswing, with renewables stocks potentially experiencing a 5% jump relative to the market in a 30-day window following a 50 basis point rate cut.

Beyond interest rates, Goldman Sachs sees a fundamental shift in power demand driving long-term growth. The rapid expansion of data centers and the increasing electrification of various industries are projected to boost power consumption by 40-50% over the next decade.

This has the potential to unlock "once in a generation" organic growth for power grids and renewable energy sources.

Goldman Sachs identifies structural underinvestment in power grids and a surge in connection requests from data centers, renewables, and electric vehicle charging points as factors that could lead to annual growth of 8-10% in this sector.

For renewables, a recent decline in capital expenditures is expected to create a supply-demand imbalance for clean energy, potentially leading to higher returns on investments.

The report concludes by highlighting several "Electrification Compounders" – companies like EON, Enel (BIT:ENEI), SSE (LON:SSE), Iberdrola (OTC:IBDRY), RWE, EDPR, and Orsted (CSE:ORSTED) – that are well-positioned to benefit from falling rates, rising power demand, and long-term trends in electrification and grid modernization. These companies, according to Goldman Sachs, offer solid earnings per share growth throughout the 2030s.