Utilities have been on fire this year as enthusiasm over booming AI electricity demand pushes the sector higher.
Case in point: The S&P 500 Utilities ETF (XLU) is up a whopping 29% so far this year — the best-performing sector to date, compared to the broader index’s 23% rise.
Much of the gains stem from enthusiasm over power producers that stand to benefit from the electrification boom — which includes Big Tech’s massive appetite for AI data centers and electric vehicles.
By 2050, electricity is projected to become the largest source of energy worldwide, according to a recent McKinsey study.
Also, five of the top 10 returning companies in the S&P 500 this year have been energy companies, noted Matt Sallee, president of Tortoise Capital. “Utilities and midstream infrastructure are going to be secondary beneficiaries of the AI theme,” he said in a recent note.
There’s no better example of that investor fever than the S&P 500’s top performer this year, power producer Vistra Corp (VST).
Shares of the Irving, Texas-based company are up 243% year to date, outperforming even AI heavyweight Nvidia (NVDA), up 186% during the same period.
On Thursday, JPMorgan analysts initiated coverage of Vistra along with two other Wall Street favorites, Talen Energy (TLN) and Constellation Energy (CEG) — all with an Overweight rating,
The analysts said the independent power producers (IPPs) stand to benefit from “a paradigm shift in power demand” amid structural tailwinds like manufacturing on-shoring, electrification trends, and data-center development.
“We do not see competitive market supply growth matching this demand, enabling IPPs to capture outsized margins for an extended period of time,” wrote JPMorgan’s Jeremy Tonet and his team.
As Yahoo Finance’s Julie Hyman pointed out, recent headlines like Microsoft (MSFT) teaming up with Constellation Energy to restart a nuclear reactor at Three Mile Island, and Amazon (AMZN) buying up a data center campus from Talen Energy have put Big Tech and its insatiable need for electricity into the spotlight.
But XLU’s massive performance this year begs the question — has it topped?
With the broader markets at all-time highs, it may be a good idea to keep investing in defensive stocks like utilities that provide dividends, said Burns McKinney, managing director and senior portfolio manager at NFJ Investment Group.
“There does seem to be a little bit more meat on the bone,” said McKinney, referring to more growth ahead.
If XLU holds its 29.1% year-to-date gains, it will be the best-ever yearly performance for the sector.
