Barron's Streetwise: "Wildfires and Utility Stocks. Plus, Merrill’s Investment Chief."

Date: February 21, 2025
Host: Jack Hough (Barron’s)
Key Guests:

• Patty Poppy, CEO of Pacific Gas & Electric (PG&E)
• Chris Heisey, CIO, BofA Private Bank and Merrill
• Jackson Cantrell, Producer
• Jomana Selehin, Head of Investment Strategy Group Europe, Vanguard

Episode Overview

This episode dives into two big topics guiding Wall Street’s conversations:

1. The turmoil facing California utility stocks amid devastating wildfires—with a deep-dive on Pacific Gas & Electric’s (PG&E) plummeting share price, wildfire liability, and the innovative regulatory response.
2. A comprehensive market and portfolio outlook for 2025—including a look at S&P 500 equal weight funds, concentration risk, and Merrill’s take on the next decade’s investment opportunities.

Key Discussion Points & Insights

1. California Utilities, Wildfires, and the Fallout for Stocks

Why Utility Stocks Are Struggling

• PG&E’s shares are down 22% YTD, bucking the trend as most utility stocks (like those in the Utilities Select Sector Spider fund) rally thanks to AI/data center-driven power demand.
• The root concern: January’s “LA fires” (not in PG&E’s territory) hammered Southern California Edison, but also triggered fears about the California Wildfire Fund's solvency and future costs for all California utilities.

Quote:
“PG and E shares have slid this year. It's not the LA fires, that's a different utility, but also it totally is the LA fires because of something called the California Wildfire Fund.” —Jack Howe (00:40)

What is the California Wildfire Fund?

• A $21 billion insurance pool funded by utilities and their customers—meant to cover fire-related liabilities.
• With LA fires possibly causing $16B in gross liabilities, the fund could take an $8B-$9B hit, raising concerns about who’ll pay to refill it and whether utilities will be left exposed.

The Investor’s Viewpoint

• Analysts (BMO, JPM) are bullish on PG&E, seeing its lack of direct LA fire liability and ongoing risk-reduction as creating rare value.
• Investors, however, are spooked that there’s “no backstop in the event of a fire if it were to occur in 2025” (12:17, Patty Poppy).

PG&E’s Operations and Wildfire Mitigation

• Significant risk reduction: “We’ve reduced our wildfire risk … by over 90%.” (14:07, Patty Poppy)
  • Billions spent on hardening, undergrounding lines, AI cameras for early fire detection.
  • Peak demand is up from data centers (AI growth), which could help lower residential rates, pending efficient capacity management.
• Continued tension: Utilities must keep convincing policymakers to maintain legal and financial protections.

Memorable Moment:
Explaining to investors why only “two years of zero major wildfires” can still be a “bragging point,” given California’s extreme risk (see 06:22–08:36).

2. Market Outlook, S&P 500 Concentration Risk, and Equal Weight Strategies

Listener Question: Equal Weight S&P 500?

• Matt from NC asks if, amidst possible tech sector volatility, investors should shift some allocation to an S&P 500 equal weight index.

Quote:
“The equal weight index has outperformed the regular market value weighted index by about a percentage point a year since 1958.”
—Jack Howe (26:21)

Why Equal Weight?

• Market cap-weighted S&P 500 is highly concentrated in tech—the highest “new economy” sector percentage since the 1960s.
• History shows concentrated benchmarks can get overvalued, with reversals possible (Nifty 50, Dotcom Bubble).
• Equal weight indices diversify sector exposure and may help dampen volatility, though not meant for entire portfolios.

Merrill’s Take: Chris Heisey on Investment Horizons

• Remains overweight equities relative to bonds, citing consumer resilience, “asset-light” companies (more innovation, less capital intensity), and a shrinking pool of investible public companies.
• Predicts the next decade could be among the best bull markets due to high asset demand vs. limited supply.

Quote:
“The next decade, we have high conviction that could be one of the best bull markets ... in the past three or four decades.”
—Chris Heisey (29:35)

Europe: A Relief Rally, Not a Rotation

• Outperformance from European equities is “a relief rally ... not enough to be cheap; you need more growth” (31:31–32:39).
• Many top European stocks earn primarily outside of Europe, questioning the region’s real economic momentum.

Sector “Rotation” Still Elusive

• Despite regular forecasts, “rotation” (shift from giant tech to broader sectors) is slow and subtle—not a “big button” shift.
• Heisey recommends using equal weight S&P 500 as a complement (“add, not replace”) for better risk-reward balance.

Quote:
“Equal weighted S and P in our opinion, should either be added, not replaced, but either added to anyone who is investing and just a cap weighted S&P 500.”
—Chris Heisey (33:20)

Investor Mistakes & Mindset

• Most investors overestimate risks; recessions and market collapses are rarer than they fear.
• “Time in the markets is your most powerful tool.” (38:44, Chris Heisey)

3. Practical Sidebars and Anecdotes

The California Utility Customer Experience

• Jackson Cantrell shares his high (and rising) LA electric rates, tempered by frugal, “three-quarters Amish” habits—illustrating the complexity of the rate landscape and climate in CA (01:38–04:00).

The “60:40” Portfolio Model

• Jomana Selehin (Vanguard) frames the famous “60:40” stock/bond allocation as less literal than investors assume, advocating for more personalized, situation- and market-driven approaches (00:00, 22:21, 39:29).

Notable Quotes & Timestamps

• On Wildfire Fund and Investor Concerns:

  • “It leaves investors concerned that there is no backstop in the event of a fire if it were to occur in 2025.”
    -- Patty Poppy (12:17)

• On PG&E’s Wildfire Progress:

  • “We’ve reduced our wildfire risk and exposure of a catastrophic wildfire by over 90%.”
    -- Patty Poppy (14:07)

• On S&P 500 Equal Weighting:

  • “The equal weight index has outperformed the regular market value weighted index by about a percentage point a year since 1958.”
    -- Jack Howe (26:21)

• On Market Risk Appetite:

  • “Asset-light era: companies are less labor- and capital-intensive. It makes sense to have higher multiples even with similar interest rates to the 1990s.”
    -- Chris Heisey (28:32)

• On Market Rotation:

  • “It's a rebalancing of money ... Equal weighted S and P ... should either be added, not replaced, but either added to anyone who is investing and just a cap weighted S&P 500.”
    -- Chris Heisey (33:20)

• On Staying Invested:

  • “Time in the markets is your most powerful tool.”
    -- Chris Heisey (38:44)

Timestamps for Major Segments

• CA Utility Bills/Rate Hikes Anecdotes: 01:38–04:00
• Wildfire Liability, Utility Stocks, and Fund: 04:00–12:17
• Interview with Patty Poppy (PG&E): 12:17–22:06
• Listener Q: S&P 500 Equal Weight: 24:12–27:58
• Interview with Chris Heisey (Merrill): 27:58–38:44

Conclusion: Actionable Takeaways

• Expect California utility stocks to remain volatile until wildfire fund liability and state-level backstops are clarified.
• PG&E’s operational turnaround isn’t enough for markets; sentiment hinges on regulation and disaster risk.
• For broad-market investors, diversifying with equal-weighted S&P 500 exposure can buffer tech concentration risk.
• Long-term, US equity markets remain compelling—asset scarcity and high demand suggest bullish structural tailwinds.
• Ignore the clamor about “market rotations”; prudent, incremental rebalancing and time in the market are wiser than chasing short-term trends.

“Time in the markets is your most powerful tool.”
—Chris Heisey (38:44)

End of summary.