Barclays has raised its recommendation on the European utilities sector, moving the group to overweight from market weight. The bank said a recent pull-back in prices has created more attractive entry levels and that the sector's fundamentals have continued to improve.
In its rationale, Barclays pointed to what it described as "strong and broadening earnings momentum across the sector," noting a large share of companies have experienced positive revisions to earnings per share estimates. The broker also identified higher power and gas prices as ongoing support for utility results in the current energy-cost environment.
Beyond near-term price support, Barclays emphasised the sector's defensive appeal should the macroeconomic outlook weaken. The report underlined improving visibility around earnings in renewables and continued policy support as additional pillars bolstering the investment case.
Barclays framed the upgrade against recent performance metrics: the European utilities index SX6P has risen 16% year-to-date, compared with a 5% gain for the broader European market index SXXP. Looking over a longer horizon, the broker noted the SX6P has climbed 35% versus a 22% increase for the broader market over the past year.
The bank said earnings resilience has been reinforced by clearer medium-term investment and regulatory visibility. Barclays also pointed to the sector's income characteristics, where dividends continue to play a supporting role for total returns.
Looking ahead, Barclays singled out 2026 as "a key inflection point for earnings and total return potential," and maintained that valuations still leave room for upside despite the run-up in prices earlier this year. On a medium-term basis, the brokerage projects an average total shareholder return compound annual growth rate of around 12%. That projection is underpinned by an assumed 9% EPS compound annual growth rate and roughly a 3% dividend yield, with those figures presented excluding any contribution from data centres.
Analysts at Barclays described data centres as a potential source of additional upside, calling them a "free option within current utility valuations" and suggesting they could contribute to further gains in 2026.
Within sub-sectors, Barclays continues to favour integrated utilities first, followed by regulated utilities and renewables, while generators are its least preferred group. The report identified RWE, Centrica and Solaria as preferred individual stocks, assigning price targets of 66, 250p and 23.5, respectively.
Implications
- The upgrade signals a more constructive view on earnings prospects and income generation in utilities.
- Energy prices and policy clarity are central drivers supporting near-term performance.
- Data centre exposure is highlighted as an incremental upside option within current valuations.