Utilities Surge Amid AI Boom

This year, the S&P 500’s utility sector has gained 14%, making it the third-best-performing category, surpassed only by information technology and communication services. This marks a notable turnaround from last year's decline, during which utility stocks fell by over 10%, underperforming the S&P 500’s 24% gain.

The sector’s performance is highlighted by impressive gains from companies like Vistra, whose shares have surged 152%, Constellation Energy with a 91% increase, and NRG Energy rising by 63%.

Last year, the AI boom drove a strong focus on big tech stocks, often referred to as the Magnificent Seven. At the same time, high interest rates made bond yields more appealing, leading investors to move away from dividend-paying stocks, particularly those in the utilities sector.

This year, there has been a shift in the narrative as big tech's market dominance has weakened and investors are looking for more affordable alternatives. Utilities have emerged as a strong contender due to their defensive nature and critical role in supporting the infrastructure needed for AI technologies.

Utilities are now trading at about 17 times their expected earnings over the next 12 months, which is lower than the S&P 500’s multiple of approximately 21 and the information technology sector’s multiple of around 28. 

Investors are betting on utilities not just for their traditional defensive qualities but also for their potential to power AI-related infrastructure. Some analysts note the significant power demands of AI, with a single Google search averaging 0.3 watt-hours of electricity and a ChatGPT request consuming about 2.9 watt-hours. The International Energy Agency projects AI-related electricity demand will increase at least tenfold by 2026.