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Utilities has put in the third-best showing this year among the eleven S&P 500 (SP500) sectors, having advanced 13.6%. Its accompanying Utilities Select Sector SPDR Fund ETF (NYSEARCA:XLU) has done even better, gaining 14.2%.
The sector has already recouped all of its losses from 2023, while having risen nearly 8% in May alone. This recent outperformance has been helped by a growing perception that the Utilities sector has become an artificial intelligence (AI) play.
Many major U.S. utilities reported their latest quarterly results over the end of April and into last week, and several mentioned the rise in demand for power from data centers in order to support complex AI processes such as language learning models.
AI is expected to drive a 160% increase in data center power demand by the end of this decade, according to a research report published by Goldman Sachs earlier this week. U.S. utilities will need to invest around $50B in new generation capacity just to support data centers alone, Goldman predicted.
“On average, a ChatGPT query needs nearly 10 times as much electricity to process as a Google search. In that difference lies a coming sea change in how the U.S., Europe, and the world at large will consume power – and how much that will cost,” Goldman said.
“For years, data centers displayed a remarkably stable appetite for power, even as their workloads mounted. Now, as the pace of efficiency gains in electricity use slows and the AI revolution gathers steam, Goldman Sachs Research estimates that data center power demand will grow 160% by 2030,” the brokerage added.
“For the first time in decades, and perhaps in my 40 years in this business, we are experiencing fundamental improvements driven by demand rather than commodity prices,” NRG Energy (NRG) top boss Larry Coben said on the company’s earnings conference call on May 7.
“We, along with every other forecasting expert I have read, are now expecting a step change in long-term power demand. This increase in demand is attributed to several factors … Recent advancements in GenAI are compounding and accelerating these factors, leading to the formation of the next power demand super cycle,” Coben added.
Constellation Energy (CEG) chief executive Joseph Dominguez on the company’s earnings conference call on May 9 noted “booming demand for artificial intelligence technologies and other digital infrastructure projects.”
“We’re seeing interest in developing projects that are on a size and scale that presently don’t exist, but will be needed for training systems and other things to kind of build out and support the need for all of these foundational models,” Dominguez said.
Duke Energy (DUK) finance chief Brian Savoy on the company’s earnings conference call said that data center growth had been a “key driver” of strength across regions in the commercial sector. The industry was seeing “unprecedented demand” from AI data centers and chip manufacturers, he added.
The Utilities sector’s sizzling hot jump in May has made investors and market participants take note, with some even calling its behavior akin to a meme stock. Kevin Gordon, senior investment strategist at Charles Schwab (SCHW), on Thursday noted that nearly 50% of the sector’s components had scaled a new 52-week peak, the highest such share since April 2022.
The rise in utility stocks also come at a time when interest rates are at a 23-year high – an interesting juxtaposition. As regulated monopolies with systems in place that account for the recovery of costs, utilities are often seen as lower-risk investments, complete with a healthy cash flow and stable dividends. Rising interest rates can hit utilities more than other sectors because they can make bonds more attractive to conservative investors seeking that yield.
Bespoke Investment Group in the following chart highlights the recent performance disparity between the S&P 500 Utilities sector and the Dow Jones Utility Index (DJU), noting that the recent move has been the widest gap since late 2002:
