Investors are starting to sell out of the market’s hottest sector

Utilities are having their best rally in decades , propelled by artificial intelligence enthusiasm and the prospect of lower interest rates, but some investors are cooling on the sector. Rate-sensitive utilities are now the best-performing sector in the S & P 500 in 2024, jumping more than 28%. The sector is on pace for its best year since 2000, when it climbed more than 50%. Over the last three months, utilities have surged 19%, while tech is off more than 3% in the same period and the broad market index has gained nearly 3%. XLU XLK,.SPX YTD mountain Utilities versus tech and the S & P 500 in 2024 Utilities are viewed as an outsized beneficiary of lower borrowing costs due to their high capital requirements. Further, their high dividend yields make them more attractive to income-seeking investors when compared to Treasurys. While these stocks struggled in the high-rate backdrop of 2022 and 2023, they stand to outperform as rates decline. The sector has also emerged as a play on the burgeoning AI trend, as data centers are expected to fuel a demand for power in the coming years. However, there are indications the utilities trade may be getting too hot. The sector is now trading 20% above its 200-day moving average. The only other time this trend has occurred was for a single day in October 2000, according to SentimenTrader founder Jason Goepfert. Kathryn Rooney Vera, StoneX chief market strategist, said Thursday on CNBC’s “Squawk Box” that while utilities were her top pick coming into 2024, she is now looking elsewhere in the market for opportunities. “What we’re recommending is [to] take gains on utilities and rotate into another defensive that has outperformed this year and could do well next year — which is health care,” she said. Analysts also think some of the top utilities could be due for a fall. Vistra Corp , the top-performing stock in the S & P 500 in 2024, is up more than 240% this year, but analysts’ price targets imply downside of 5% from current levels, according to LSEG. Constellation Energy , which has surged 137% this year, is expected to slide 3% from current levels, per LSEG. For the time being, investors are still flocking to the names: Vistra and Constellation hit fresh all-time highs on Thursday.