Key Highlights

• Utilities and REITS traditionally lead flight to safety flows, acting like bonds more than stocks
• Correlations are shifting, as win-win views bubble up into July for AI demand and utilities
• Focus on U.S. debt limit and taxes along with Fed policy keeps real estate under pressure

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Diverging trends in Utilities and Real Estate holdings

EXHIBIT #1: U.S. REIT AND ELECTRIC UTILITY HOLDINGS COMPARED TO VNQ ETF

_{Source: BNY, Bloomberg}

As we end the month, quarter and first half of the year, our iFlow Mood index is back in extremely negative territory despite the rally in equities this week. Global shares were volatile because of events in the Middle East. Oil, which has served as the market’s preferred barometer, is off over 13% on the week and the relief that this provides can be seen in lower yields and a lower dollar, which supports U.S. equities in particular. Investors have been displaying traditional summer investing behavior – climbing a wall of worries – leading risk markets higher. The month ahead harbors significant risks in the form of U.S. tariffs and potential deals, U.S. taxes and debt ceiling limits, Japan elections and more rate decisions from the FOMC and BoJ. Ongoing geopolitical events remain in play from Iran-Israel to Russia-Ukraine. Looking at our equity holdings, we are 1% over the 3-year average in the U.S., 5% over average in Europe and 3% over in APAC. Investors are displaying a barbell approach: long IT and Communications but also long some “safe cyclical” sectors like Utilities and Consumer Staples. There was significant demand globally for shares of Utilities and Real Estate this week despite near-record highs. However, holdings have diverged, with Utilities in the U.S. now above 2024 levels but Real Estate 3% below.

Our take 

iFlow holdings of U.S. REITs are 6% below the 3-year average, while electric utilities are 1% above. The performance of VNQ, one of the largest REIT ETFs, is 4% over the 3-year average. While they have been significantly correlated over the past three years, Utilities and Real Estate are now starting to diverge. The biggest U.S. equity theme in 2025 has been the resilience of the Utilities sector. The outperformance of this sector reflects the role of AI investments, led by big technology “hyper-scalers” increasing demand for electricity to power data centers. Broader Utilities and Real Estate sector holdings have been driven by views on the FOMC and the overall economy overall, with recession concerns making these sectors favorites for safe income. The current underperformance of Real Estate suggests that tax worries and other factors like FOMC policy are also significant.

Forward look 

Looking ahead to Q3, there are two potential risks for Utilities: positions could revert to their average, with a rotation to other safe income sectors, or the connection to AI investment flows may hurt if big tech correlations drag down performance. The divergence of the Real Estate sector reflects the changing landscape on hopes for a Fed rate cut in the rest of the year against ongoing fears of a larger downward correction of home prices. The sector has become a hedge for downside risks in a market that has been reluctantly adding to risk. Utilities have won the “beauty contest” of being a win-win hedge in a downturn and to survive ongoing rallies. The ability to last will pivot on whether growth and inflation fears dissipate.

Rate sensitivity between Utilities and Real Estate highlights other risks

EXHIBIT #2: HOLDINGS OF REAL ESTATE AND UTILITIES VS. U.S. 10Y YIELDS

_{Source: BNY, Bloomberg}

EXHIBIT #3: CORRELATION MATRIX FOR U.S. REAL ESTATE, UTILITIES, TECH ETFS, 5Y VS. 10Y 

_{Source: BNY, Bloomberg}

Our take 

The role of 10-year yields in driving the positioning around both Utilities and Real Estate and their underlying industrial components is mixed – with higher real rates matching higher real growth – leaving correlations positive. Negative correlations show up when there is a surprise to policy or to growth. The current environment has high uncertainty and a nascent negative correlation of both sectors to yields. The Utilities sector is slightly more volatile and less linked to Real Estate. The implication is that we are returning to May 2024 cycle outlooks for markets, suggesting equity markets are leaning on FOMC rate cuts and ongoing AI investments.

Forward look 

The link between Utilities and the AI boom is recent – only showing up in the last three years, and really only in the last 18 months in how investor’s view Utilities. The 5-year correlation matrix (Exhibit #3) highlights what might happen if we see an unwinding technology investment boom. The rotation risks for investors in Q3 are important and the safe-haven search for investors in bonds and fixed income-like equity shares like REITS and Utilities will continue. Gaming the timing of when U.S. tariffs will hurt growth and how that changes rate outlooks is part of the puzzle. The biggest bet for investors could be on the rotational shift between Real Estate and Utilities in the months ahead.

Bottom line

The global financial landscape is experiencing notable shifts, particularly within the Utilities and Real Estate sectors, as geopolitical tensions and macroeconomic factors shape investor behavior. Traditionally, Utilities and REITs have functioned as safe havens, similar to bonds, during market uncertainty. However, recent developments indicate a divergence in these sectors, influenced by AI demand and geopolitical events. The next quarter will evaluate the balance of housing weaknesses and the impact on Real Estate against the robust expectations of ongoing demand for AI data center utilization. The role of FOMC reaction functions to both views showing up in the economic data will prove out the value of bonds and stocks.

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