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Sales growth has slowed sharply after a two-year surge. But analysts expect the American luxury market to bounce back soon, as brands open more stores and adapt their offer to changing tastes.

High energy prices and inflation, geo-political turmoil and the tightening of monetary policy have taken their toll on consumer sentiment, dampening the “YOLO” attitude that drove unprecedented growth for luxury fashion brands since the pandemic.

But after slumping last year, shares in most listed luxury groups are now trading around multi-year-highs, suggesting that investors are increasingly confident that demand for high-end products will defy the general gloom.

To be sure, improved valuations are mostly being driven by hopes for a rapid rebound in Chinese spending following the lifting of strict anti-coronavirus measures. But the rosier outlook is also informed by a growing sense that in spite of macroeconomic gloom and a financial panic, the slowdown in the US market — luxury’s growth engine since the pandemic — may be less severe than expected, and relatively short-lived.

Even amid interest rate hikes, layoffs and a banking panic sparked by the collapse of two regional banks in March (Silicon Valley and Signature), the US market is expected to grow 7 percent this year, analysts at HSBC said. Bernstein expects sales to American clients to grow between 5 and 7 percent — a sharp slowdown compared to the last two years, but far from a collapse.

American luxury sales have exploded since the pandemic, rising 35 percent over 2019 levels to reach €113 billion last year, according to consultancy Bain. Last year alone luxury brands’ sales rose 25 percent in the region even as a deteriorating economic picture pounded the stock and housing markets.

But cracks finally started to show in November, with sales of entry-level luxury products slowing sharply in the holiday season. The US market is “taking a breather,” Gucci- and Saint Laurent-owner Kering’s chief financial officer Jean-Marc Duplaix said in a February press conference. “Aspirational clients in particular are sort-of taking a break.”

Growth slowed more sharply from the start of the year, dropping to a low single-digit rate, market sources and analysts estimate. Credit and debit card data from Mastercard showed a 4 percent year-on-year increase in apparel spending for February, with consumers putting an “emphasis on pricing and value” in their choice of retailer, the payments company said.

Still, luxury brands are determined to hold onto the flood of new customers they’ve attracted since the pandemic — a breakthrough in a market where fashion buyers have long been hooked on discounts, and even wealthy households tend to prioritise other categories like houses and cars (not to mention experiences like restaurants and travel).

Brands have been staging big-budget marketing events like Versace’s March show in Los Angeles, accelerating the pace of targeted clienteling initiatives like dinners with celebrity guests and couture pop-ups in places like Napa Valley and the Hamptons.

And, even as growth slows, brands have forged ahead with plans to roll out new stores in fast-growing second- and third-tier cities, where pockets of wealthy consumers have long been overlooked, and whose expansion has accelerated since the pandemic. Think Hermès in Naples, Florida; or Saint Laurent in Charlotte, North Carolina.

“Brands are not pulling back on their plans [for store openings],” New York-based luxury consultant Robert Burke said. “We’re able to gather more data than ever about local markets, and realised the strength of cities like Denver, Colorado or Nashville, Tennessee. There’s a pocket of customers in these cities that just love to shop.”

“The growth in cities like Nashville or Charlotte, it’s structural. It’s not going to disappear,” Kering CEO François-Henri Pinault said.

Refurbished and expanded stores in the most visible shopping capitals are also underway: Tiffany’s “Landmark” project — a complete overhaul of its iconic flagship store on 5th Avenue — is set to open in May. Valentino is set to open an expanded Madison Avenue location later this year.

Analysts expect that store openings, as well as revamped collections, will help to re-energise sales, with growth picking back up (albeit at a more modest pace) from the second half of the year. The industry will also face easier comparisons as it annualises Americans’ rebound in travel, which conspired with a strong dollar to drive a sharp increase in tax-free shopping in Europe in the second half of last year (to the detriment of US stores).

“There’s been an exodus of wealthy shoppers to Europe and you’re following two years of exuberance,” HSBC analyst Erwan Rambourg said. “Right now we see the US demand for luxury as being in a bit of an air pocket, but we think it’ll pick back up.”

An aesthetic shift toward more timeless, elevated styles could also help brands keep growing in the US: attracting more mature clients who weren’t as interested in luxury’s recent logomania, and who are more likely to be insulated from inflation and layoffs. “Timeless luxury is very relevant right now,” Burke said.

But that same aesthetic shift could also ratchet up the pressure on luxury’s aspirational customers: many lower-income consumers and HENRYs (High Earners Not Rich Yet) who splurged on $900 sneakers in recent years would balk at paying $4,000 for a suit. More some, keeping up with changing tastes may require trading down to less expensive brands.

Still, “luxury goods are seen to be addictive: the boost in self-esteem they provide is hard to give up,” Bernstein analyst Luca Solca wrote in a recent note to clients. “The expectation is that European and US consumers will prove sticky and won’t give up on buying luxury goods products.”

Last week we speculated if we were seeing the immediate effects of Silicon Valley Bank’s collapse with so few large rounds. This week, it seems almost impossible to deny the bank’s failure is having at least some short-term effects on fundraising. Again, this may only be temporary — as the bank helped facilitate closing deals by providing credit facilities before VCs would actually collect money from LPs — but there certainly seems to be an effect as there were no nine-figure rounds this week in the U.S.

1. Coursedog, $90M, edtech: Ever not get into a class you really wanted to take when you were in college? Sure, everyone who went to school has confronted that problem. Cousersedog raised $90 million from JMI Equity to help solve that exact issue. The New York-based startup has created an “academic operations platform” for higher-education institutions, helping in curriculum planning, course scheduling, event management and catalog management. In total, it helps colleges schedule classes better. More than 170 institutions use the platform, including Columbia University — the alma mater of Coursedog’s founders. Founded in 2018, the company has raised nearly $113 million, per Crunchbase.

2. Graphiant, $62M, information technology: Connecting a company’s data centers, clouds and other tech services can be difficult. San Jose-based Graphiant, an edge services provider, is looking to make that simpler and faster. The startup raised a $62 million Series B led by Two Bear Capital. Its founder and CEO — Khalid Raza — knows the tech space well. He previously founded networking startup Viptela, which was bought by Cisco Systems in 2017 for $610 million. Founded in 2020, Graphiant has raised $96 million to date, per the company.

3. DataDome, $42M, cybersecurity: Bad bots are everywhere, but that doesn’t mean companies are defenseless. New York-based DataDome helps companies fight against AI-powered online fraud and bot attacks. Just last year, the startup says, it stopped more than 250 billion online fraud attempts. That track record likely helped it raise a $42 million Series C this week led by InfraVia Growth. Founded in 2015, the company has raised more than $80 million, according to Crunchbase.

4. P97 Networks, $40M, fintech: Everyone pays at the pump these days (assuming you don’t have an EV). Houston-based P97 Networks, one of the companies that makes that possible, raised a $40 million equity financing led by Portage this week. P97 provides mobile commerce and digital marketing to the convenience retail, auto industry and fuel markets. The company’s platform is used in more than 65,000 convenience stores and gas stations. It also is used at over 240,000 EV chargers — if you do have an EV. Founded in 2012, the company has raised nearly $110 million, according to Crunchbase.

5. Modern Electron, $33M, energy: Bellevue, Washington-based Modern Electron, a hydrogen heating company, raised a $32.8 million round, per a report. The cleantech startup has a solution that decarbonizes gas use by converting it to clean hydrogen onsite without CO2 emissions, and another that converts heat to power. Its investors include Bill Gates and At One Ventures. Founded in 2015, the company has raised nearly $74 million, per Crunchbase.

6. Sonoma Biotherapeutics, $30M, biotech: South San Francisco-based biotech firm Sonoma Biotherapeutics received a $30 million equity investment from Regeneron Pharmaceuticals. Founded in 2020, the company has raised $365 million, per Crunchbase.

7. Type One Energy, $29M, energy: Madison, Wisconsin-based fusion power startup Type One Energy closed a $29 million round co-led by Breakthrough Energy Ventures, TDK Ventures and Doral Energy-Tech Ventures. The funding is the company’s first.

8. Spiral, $28M, fintech: New York-based social impact fintech startup Spiral closed a $28 million Series A led by Team8. Founded in 2019, Spiral has raised $42 million, per the company.

9. Perplexity AI, $26M, artificial intelligence: San Francisco-based Perplexity AI, a conversational AI-powered search engine, raised a $25.6 million Series A led by New Enterprise Associates. Founded in 2022, the company has raised nearly $29 million, according to Crunchbase.

10. LeapXpert, $22M, enterprise software: New York-based business communication platform LeapXpert locked up a $22 million Series A+ round led by Rockefeller Asset Management through its Technology Ventures Group. Founded in 2017, the company has now raised $36 million, per Crunchbase.

The top three rounds all happened outside the U.S. this week.

Thought is ever-changing electrical patterns unconnected to individual neurons. Meta is working on a system to read your mind.

The world has been learning an awful lot about artificial intelligence lately, thanks to the arrival of eerily human-like chatbots.

Less noticed, but just as important: Researchers are learning a great deal about us – with the help of AI.

AI is helping scientists decode how neurons in our brains communicate, and explore the nature of cognition. This new research could one day lead to humans connecting with computers merely by thinking–as opposed to typing or voice commands. But there is a long way to go before such visions become reality.

Celeste Kidd, a psychology professor at the University of California, Berkeley, was surprised by what she discovered when she tried to examine the range of opinions people have about certain politicians, including Barack Obama and Donald Trump.

Her research was intended to explore the widening divergence of how we conceive of subjects to which we attach moral judgements – such as politicians. Previous work has shown that morally-fraught concepts are the ones people perceive in the most polarized ways.

To establish a baseline for her experiment, she began by asking thousands of study participants about their associations with common nouns, in this case animals.

What she discovered was that even for common animals – including chickens, whales and salmon – people’s notions of their characteristics are all over the map. Are whales majestic? You’d be surprised who disagrees. Are penguins heavy? Opinions vary. By quizzing people on many such associations, Dr. Kidd was able to amass a pool of data that clusters people according to which of these associations they agree on. Using this method, she found that people can be grouped into between 10 and 30 different clusters, depending on their perception of an animal.

Dr. Kidd and her team concluded that people tend not to see eye to eye about even the most basic characteristics of common objects. We also overestimate how many people see things as we do. In a world in which it feels like people are increasingly talking past one another, the root of this phenomenon may be the fact that even for citizens of a single country speaking a common language, words simply don’t mean the same thing to different people.

That might not seem like a very profound observation, but what Dr. Kidd’s research suggests is the degree to which that’s true may be much greater than psychologists previously thought.

Arriving at this insight required the application of a tool of mathematics that makes many kinds of AI possible – known as a “clustering model”.

The most important feature of AI which enables new kinds of research, says Dr. Kidd, is the same that makes possible AI chatbots like OpenAI’s ChatGPT, Google’s Bard, and Microsoft’s Bing chat: It’s the capacity of modern computer systems to process a lot more data than in the past. It “opens up a lot of possibilities for new insights, from biology to medicine to cognitive science,” she adds.

In her research, Tatiana Engel, an assistant professor of neuroscience at Princeton University, uses the same kinds of networks of artificial neurons that are behind most of what we currently call artificial intelligence. But rather than using these to better-target ads, or to generate fake images, or compose text, she and her team use them to interpret the electrical signals of hundreds of neurons at once in the brains of animals.

Dr. Engel and her team then go a step further: they train networks of artificial neurons to perform the same tasks as an animal – say, a swimming worm. They then find that those artificial networks organize themselves in ways that reasonably approximate the way they’re organized in real animals. While neural networks in the brain are vastly more complicated, the result of this simulation is a model system that is both close enough to its biological equivalent, and simple enough, to teach us things about how the real brain works, Dr. Engel says.

One key insight this yields is that the actual substance of thought – the patterns that constitute the mind you’re using to read this sentence – is dynamic electrical activity in our brains rather than something physically anchored to particular neurons.

In other words, in contrast to what neuroscientists once believed about how we make decisions, there are no “eat the chocolate” neurons and “don’t eat the chocolate” neurons. Thinking, it turns out, is just electrical signals zooming about inside our heads, forming a complex code which is carried by our neurons.

What’s more, AI is letting scientists listen in on the things that happen in our brains when we’re not doing anything in particular.

“This allows us to discover the brain’s internal life,” says Dr. Engel.

Do androids dream of electric sheep? We don’t know yet, but we may soon be able to determine if humans are thinking about the real thing.

If a research lab owned by Meta META 1.97% Platforms, Facebook’s parent company, figuring out how to read your mind makes you at all uncomfortable, you’re probably not going to be a fan of what the rest of the 21st century has in store.

Historically, it’s been very difficult to measure brain activity inside our heads, because the electrical signals generated by our brains, which are miniscule to begin with, must be measured from outside of our skulls. ( Elon Musk’s aspirations for his Neuralink startup notwithstanding, opening up our heads and putting in brain interfaces hasn’t proved popular.)

But progress in artificial intelligence techniques is yielding a more-powerful amplifier of those weak brain signals. Meta’s AI lab published research on one such mind-reading technology last summer.

Meta scientists didn’t actually stick anyone in a brain scanner. Instead, they used data on brain signals gathered by researchers at universities. This data was captured from human subjects who were listening to words and phrases, while sitting in non-invasive brain scanners. These scanners came in two varieties: One was the sort of electrodes-embedded-in-a-swim-cap with which many people are familiar, called an EEG (short for “electroencephalogram”). The other looks like a supervillain’s attempt to create a world-crushing megabrain, called a MEG (for “magnetoencephalogram”).

To analyze this data, researchers used a type of AI called a “self-supervised learning model.” Without this technique, the latest generation of AI chatbots would be impossible. Such models can extract meaning from giant pools of data without any instruction from humans, and have also been used to try and figure out what animals are communicating with each other.

A little less than half of the time, Meta’s AI algorithm was able to correctly guess what words a person had heard, based on the activity generated in their brains. That might not sound too impressive, but it’s leaps and bounds better than what such systems have been able to achieve in the past.

Alexandre Défossez, a scientist at Meta who was part of the team that conducted this research, says that the eventual goal of this work is to create a general-purpose “speech decoder” that can directly transform our brain activity–our thoughts–into words.

Imagine texting a friend just by thinking about it – as long as you’re wearing an EEG cap at the moment, at any rate. The technology could have a big impact on the lives of people who are unable to communicate in other ways, adds Dr. Défossez.

It’s just one more example of the way that AI might someday give us the tools for improving our individual and collective well-being – or at least an explanation for why, in the age of social media, both of those things frequently seem so deranged.

Write to Christopher Mims at christopher.mims@wsj.com

Deadline for Recharge Industries to finalise purchase of site runs into impasse with EY

Recharge Industries’ attempt to buy the Britishvolt site is at risk of collapse due to a dispute between the Australian company and administrator EY over a power supply contract signed by the failed battery start-up, according to people familiar with the matter.

The Geelong-based business bought Britishvolt’s intellectual property — 23 staff and its prototype battery technology — for £8.6mn last month and under exclusive rights had until Friday to pay for the coveted land in Blyth, north-east England.

Recharge has yet to pay the £9.7mn for the land despite the deadline passing, and the deal is in jeopardy after the two sides hit an impasse over payments related to transferring a grid connection contract with National Grid, according to two people familiar with negotiations.

The setback adds to the scrutiny that EY is coming under for its dual role as strategic adviser to the firm during its life — resulting in it becoming the battery company’s fifth-largest creditor — and administrator upon its collapse.

EY said in a statement that the administrators “are not requesting that Recharge make any additional payments beyond those contractually agreed as part of the sale. The company will only retain funds, including any received from third parties, to which it is entitled to.”

Recharge believes it is entitled to receive a refund made by National Grid to the EY-controlled Britishvolt bank account since it must pay the equivalent amount to the UK electricity system operator, according to one person.

The collapse of Britishvolt and troubles for its successor have dealt a blow to the UK’s ambitions to foster an electric car industry and attract the battery plants that would form the cornerstone of it.

Battery manufacturing consumes a lot of electricity, making access to plentiful and cheap power vital for any factory. The Blyth site is widely considered one of the best in the UK and is the ultimate prize for Recharge Industries because it is located next to an interconnector that would supply clean and affordable power.

The opposition Labour party has pledged to provide £2bn to support the construction of eight battery gigafactories in the UK to sustain the country’s automotive industry if it were to form a government. However, the window for the UK to secure battery plant investments is rapidly narrowing as automakers make momentous decisions on where to locate their supply chain.

Founded in 2019, Britishvolt entered administration in January after limping between financing rounds without firm customer orders and running out of cash to build its envisaged £3.8bn battery plant.

Recharge Industries, which is run by former PwC partner David Collard, has threatened to walk away from buying the site if there is uncertainty over the status of its access to a grid connection, the people said.

Recharge Industries declined to comment.

Move expected to attract private equity interest as Germany seeks to boosts its military capacity

German industrial group ThyssenKrupp has revived plans to sell its submarine and maritime systems unit, a move likely to face scrutiny from politicians and government officials as Berlin seeks to boost its defence manufacturing.

The decision was announced by employee representatives on Friday in an email to workers seen by the Financial Times. Employee representatives make up half of Thyssenkrupp’s supervisory board.

A bidding contest is expected to start after Easter, according to three people close to potential buyers. Private equity firms are among the parties interested, they said.

The division, which includes the group’s shipyards in Kiel in northern Germany, acquired a shipyard in Wismar last year in anticipation of more submarine orders from the German government. In 2021 the group won a €5.5bn contract to deliver four of the vessels to Norway and two to Germany.

It generated €1.8bn in sales last year and €32mn in adjusted earnings before interest and tax in 2022.

Russia’s invasion of Ukraine has led to mounting interest from buyout groups into the defence sector, as governments across Europe increase military spending.

That has prompted what German chancellor Olaf Scholz has called a Zeitenwende, an epochal shift, spurring the country to massively increase its military spending, revamp its army and bolster its defence industry, after decades of reluctance in the wake of the country’s second world war legacy.

But one person close to ThyssenKrupp said the company did not expect the government to intervene. Board discussions on Friday suggested that Berlin “supports the formation of a strong national shipbuilding company”, according to the employee memo.

A committee would be set up in the “near future” to “take the interest of the employees into account”, according to the memo to workers.

ThyssenKrupp declined to comment for this story.

ThyssenKrupp, once a symbol of Germany’s industrial might, has for years been plagued by losses as it grapples with slowing demand from the country’s automotive industry for its steel.

The 200-year-old company is in the final phase of a restructuring to pay down debt. Over the past years the Essen-based group has sold its car parts and infrastructure businesses, an Italian stainless steel plant and its elevator operations, which it sold for €17bn in 2020 to private equity.

The company’s share price dropped by more than 8 per cent last month when the company said its plans to offload its marine systems and steel units were delayed.

Employee representatives noted on Friday that there were no “concrete plans” regarding Thyssenkrupp’s steel unit — which was the original activity of the group — nor regarding its stake in the Hüttenwerke Krupp Mannesmann plant.

They criticised management lead by chief executive Martina Merz for the delays. “There has been a lack of an overall concept from the board for months,” they wrote. “Nothing has changed since last autumn and time has been wasted again unnecessarily.”

The road to a U.S. ban on TikTok, the popular app owned by Chinese company ByteDance, is long and twisted, even as support builds for bipartisan legislation that would give the White House authority to ban not just TikTok but other Chinese information and communications technology companies. Expect more volatility for Chinese and U.S. companies along the way.

But the direction of travel is clear: The U.S. and China are in a slow-motion decoupling in critical areas like technology. TikTok, the short-video app used by 150 million Americans, is the highest-profile company targeted by the U.S., as policy makers increasingly view the relationship with China through the lens of national security. But it’s not the first or most important Chinese company to get caught in the crosshairs, nor will it probably be the last.

Companies have been bracing for retaliation from China for measures the U.S. has taken. But nothing significant has happened, even after the U.S. in 2019 blacklisted China’s Huawei Technologies, the world’s largest maker of telecom equipment, curtailing its access to advanced chips. China also hasn’t retaliated after the Biden administration last fall restricted China’s access to advanced chips technology, hampering Beijing’s efforts to build up its domestic chip industry.

“Banning TikTok, or forcing a sale, would not inflict significant pain on China and is certainly far less of an issue than other recent decisions by Washington,” says Andy Rothman, investment strategist at Matthews Asia. While a decision to ban or restrict TikTok would further strain the relationship, Rothman doesn’t expect Beijing to take retaliatory actions against U.S. companies.

Part of the reason: Options are limited. “Beijing has been wanting to do something to push back, but it didn’t have leverage in the tech ecosystem to counter U.S. efforts,” says Xiaomeng Lu, director of geotechnology at Eurasia Group, who thinks that Beijing’s retaliation will focus on prohibiting the divestiture of TikTok or the transfer of its algorithm in any sale.

That would force the U.S. to pursue a ban, possibly in an election year when both sides are courting younger voters who view TikTok as a daily necessity rather than a national security risk.

Though China has limited immediate options to retaliate much further, Lu says it is positioning for the long run by reshuffling government agencies and retooling its chip strategy to bolster its defenses, and in ways that could potentially disadvantage U.S. companies.

Others see China making subtle decisions like sitting on mergers before Chinese regulators or rewarding European or Asian rivals of U.S. companies. For example, Gavekal’s head of research, Arthur Kroeber, says that U.S. carriers didn’t get a single flight slot at Beijing’s second-largest airport when it recently opened.

But a consumer-oriented boycott or move against companies with significant operations in China, such as Apple (ticker: AAPL), is unlikely. “Retaliation against Apple or any firm like that would be counterproductive. They want to preserve the ecosystem and capability and relationships that having Apple operating in China and Foxconn assembling phones create,” says Thomas Gatley, senior analyst at Gavekal, noting that’s especially true as companies like Apple look to diversify their supply chains.

The takeaway for investors: While most of the companies ending up on U.S. blacklists aren’t publicly owned, a handful of big Chinese technology and internet companies, including Alibaba Group Holding BABA –1.16% (BABA) and Baidu BIDU –1.89% (BIDU), have cloud businesses or data that could eventually put them in the crossfire.

For those drawn lately by China’s economic recovery prospects, focusing on companies catering to Chinese consumers may be a less volatile way to participate, through exchange-traded funds like Global X MSCI China Consumer DiscretionaryCHIQ –0.88% (CHIQ) or active funds from veteran emerging markets managers who tend to favor companies focused on domestic consumers, like Matthews China fund (MCHFX) or William Blair Emerging Markets Growth (WBEIX).

For those focused on the U.S., the investment impact will be felt over the course of some years, as companies reassess new investments in China following three harsh years of Covid restrictions that pummeled the economy. China’s crackdowns on the property and technology sectors, and President Xi Jinping’s interventionist policy approach, also are considerations.

Another variable: The U.S. has increased scrutiny of investments in China and restricted access to core technologies, while China is beefing up efforts to rely less on the U.S. and others.

“It is becoming increasingly treacherous for multinational corporations to navigate through barriers to private enterprise that are being constructed by the U.S. and Chinese governments—and some are finding themselves forced to choose which of the world’s two largest economies is more important to them,” says Kurt Tong, a managing partner at consultancy the Asia Group and former U.S. consul general in Hong Kong.

These shifts will be like ice melting—a very slow but significant reshaping of relationship and corporate strategy that will create spillovers in different parts of the global economy and markets—and that will force a rethink by investors and companies.

“This is a multidecade regime change, one in which national security has replaced economic interests,” says Mohamed El-Erian, chair of Gramercy Funds Management and former deputy director of the International Monetary Fund. Increased nationalism in China could push U.S. companies to follow in the footsteps of Yum! Brands (YUM), which spun off its China operations years ago into Yum China Holdings YUMC +0.64% (YUMC). “Today, Yum China is viewed as a Chinese company, but Yum! Brands receives dividends,” El-Erian says.

The bigger question may be the outlook for Chinese companies operating in the U.S., especially if the Restrict Act passes in its current form. Such legislation could create an existential risk for Chinese technology companies in the U.S.—and, if nothing else, make it difficult for these companies to expand in critical sectors that fall under a broad national-security umbrella.

Even if the U.S. and China maintain a “managed decline” in their relationship, Chinese telecom, aerospace, defense, and technology companies—especially semiconductors and quantum-computing companies—could be targets of additional restrictions and sanctions, says Clayton Allen, a director at Eurasia Group focusing on politics and policy.

The battle could also expand to new fronts, including inputs for electric vehicles, an area where China has more leverage, given its dominance in parts of the clean-energy ecosystem.

“The two complementary economies attract each other like magnets, but a thicket of economic and national-security concerns—and a backdrop of deep distrust—are pulling deals apart,” says Asia Group’s Tong.

Utility stocks have disappointed this year, losing 5%, on average, compared with a gain of 5% for the S&P 500SPX +1.44% index. Although that’s frustrating for shareholders, there may be a silver lining: more attractive valuations and higher yields for investors looking for defensive plays if the economy deteriorates.

These stocks aren’t dirt cheap, even with the recent underperformance. The S&P 500 Utilities IndexSP500.55 +0.76% fetches about 18 times this year’s profit estimates, below its five-year average of 19.2 times, but in line with the market average. However, utilities yield 3.3%, on average, nearly double the S&P 500’s 1.7%.

Investors can pick up more income in cash proxies like money-market funds, six-month T-bills near 5%, or two-year U.S. Treasuries at 4.1%. But utilities should benefit from a smoother interest-rate climate once the Federal Reserve stops raising rates, possibly in the next few months. Utilities may also offer more capital appreciation than bonds if the economy weakens and investors shift to defensive stocks.

“If a rotation is going to occur, it’s likely because something gets worse, in which case you want to own defensive sectors,” says Liz Young, head of investment strategy at digital bank SoFi.

Moreover, utilities offer dividend growth, while bonds pay fixed income, based on their coupon rates. Eventually, bond investors will have to reinvest into lower-yielding cash vehicles, “versus a utility dividend that is growing over time,” says Bobby Edemeka, a PGIM Jennison UtilityPRUAX +0.85% fund (PRUAX) portfolio manager.

Jay Hatfield, who runs the actively managed InfraCap Equity IncomeICAP +0.97% exchange-traded fund (ICAP), says he recently increased his utility allocation by a few percentage points, to 15%. “We don’t know what the next trend is, but it’s reasonable to be cautious until the banking crisis is resolved and/or the Fed goes on hold” with rate hikes, he says.

The fund’s holdings include Duke Energy (DUK), which yields 4.2%; Southern Co. (SO), at 3.9%; and Dominion Energy (D), at 4.8%.

Edemeka says that electric utilities have strong tailwinds, such as a growing emphasis on clean energy. They are also investing capital to upgrade their portions of the grid for transmitting and distributing power for things like electric vehicles, allowing them to charge higher rates to recoup capital expenditures. “They are well positioned to sustain consistent earnings and dividend growth,” he says, adding that he expects annual dividend increases of 5% across the U.S. electric utilities spectrum.

One of the fund’s holdings is CenterPoint Energy (CNP), a Houston-based utility that is investing heavily to upgrade its Texas grid, partly because of some bad storms. Analysts expect CenterPoint to earn $1.49 a share this year, up from $1.38 in 2022, and $1.62 in 2024. The stock yields 2.6%. Last year, the company’s dividend payout ratio—the percentage of profits it dispenses to shareholders—was about 50%, below the peer average of 65%, according to Edemeka. That should give it enough room to keep boosting its dividend at a 7%-to-8% annual clip.

Another holding is Ameren (AEE), based in St. Louis and yielding 2.9%. The company is investing in its transmission and distribution grid, and it’s shifting power from some coal plants to renewable sources. All of that should support 6%-to-8% earnings growth, says Edemeka. The company’s payout ratio last year was a little below 60%, leaving upside for the dividend.

SoFi’s Young likes the setup for the sector overall. “Utilities feel like a better place to build that defensive exposure if you don’t have it,” she says.

Banks are likely to feel pressure from all sides for the foreseeable future.

It isn’t just depressed valuations and the specter of more regulation in response to the collapse of Silicon Valley Bank and Signature Bank. Banks are also going to be struggling with ramifications of an increasingly challenging deal-making climate.

With the Federal Reserve expected to slow—or even pause—interest-rate hikes, Wall Street has been hoping that merger-and-acquisition deals would increase as funding costs stabilize, giving a much-needed boost to banks’ advisory fee revenue. But the recent banking turmoil has raised concerns that reduced lending and greater risk aversion might spill over to nonbank industries, again putting deal making on ice despite recent signs of growth.

“How long it will take for green shoots to re-emerge remains to be seen, but with financing costs rising/availability tightening, there was clearly less confidence in activity inflecting in the second half of 2023,” writes Wolfe Research managing director Steven Chubak in a research report.

And banking may face other pressures as it becomes a target for deal making. Regional and larger savings banks have grown increasingly vulnerable to activism after their financial position weakened due to the rising cost of funding, notes Jason Frankl, a senior managing director at FTI Consulting, in a report.

While consolidation for the industry would be welcome to shareholders, it could cause unwanted noise in the near term.

Rolls-Royce is synonymous with classic British luxury cars. But the company doesn’t actually make cars anymore—that unit has been a subsidiary of Germany’s BMW since 2003.

Rolls-Royce still exists as its own company, though. It is mainly an aerospace firm, making and maintaining high-powered engines. It’s more like General Electric than Ford .

Shares of Rolls-Royce Holdings (ticker: RR.UK) have jumped this year under new Chief Executive Officer Tufan Erginbilgic on hopes he will turn things around after years of underperformance.

Rolls-Royce’s underlying profit rose more than 50% in 2022. The company gets the bulk of its income from servicing aircraft engines, and it says that engine flight hours, a key metric, will continue to increase this year. It expects flight hours to reach as much as 90% of the prepandemic levels of 2019 this year. They were at just 65% of that in 2022.

“Historically, Rolls-Royce has traded at a low valuation to peers,” say analysts led by George Zhao at Bernstein. “The strong 2022 finish and 2023 [guidance] could lead to optimism for investors that the company is on the path to improved performance and improved confidence.”

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London-based Rolls-Royce employs 41,875 staff and has a market value of 12.3 billion pounds sterling ($15.1 billion). It develops, manufactures, and services power systems, or engines, for vehicles on land, air, and sea.

Rolls-Royce fetches 27.4 times this year’s expected earnings and is valued at a 60% premium to peers. Shares are up 53% this year, to £1.43. The average target price among 12 analysts surveyed by FactSet is £1.52.

Christophe Menard, an analyst at Deutsche Bank, says shares could rise to £1.60. That’s on the back of a prediction that operating profit will climb by around 19%—and that’s without an expected boost from Erginbilgic’s latest turnaround drive.

Erginbilgic, a dual Turkish-British national, took the helm in January. Rolls-Royce had a difficult pandemic as travel restrictions kept most airplanes grounded. Predecessor Warren East launched a restructuring program in the wake of the Covid-19 downturn, eliminating 9,000 jobs to save on costs.

When Erginbilgic started the job, he said the company was in danger of becoming a “burning platform” and that it was a last chance to win investors back. He pledged to focus on efficiency and optimization, and demanded that the business worry more about profit and loss and less about increasing market share.

Erginbilgic spent more than 20 years at oil and gas giant BP, leading its refining and market division and overseeing the company’s investments in electric-vehicle charging.

He left BP in 2020 after being passed over for the top job. He told journalists he was attracted to Rolls-Royce because of its global brand, and because it was an opportunity to help transition the company to a low-carbon future.

The more immediate task for the new CEO is returning Rolls-Royce shares to their former glory. They traded as high as £3.60 in 2014, and were above £3 in May 2019, not long before the Covid-19 pandemic struck.

Bernstein’s Zhao still sees a risk that shares could falter if the company can’t follow through on its new plans. His price target is £1.08, 28% lower than where shares are currently trading.

“We will need clarity on new targets and strategies,” Zhao says, adding that the company still needs to execute and deliver on the targets.

“That will take time, with downside risks of false starts,” he says.