Utilities have been on fire this year as excitement over growing demand for AI-driven electricity pushes the sector higher.
Concrete example: the S&P 500 Utilities ETF (XLU) is up 29% so far this year – the best-performing sector yet, compared to the broader index’s 23% rise.
Much of the gains come from enthusiasm among power producers who 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 expected to become the world’s largest energy source, according to a recent study. McKinsey study.
Additionally, five of the ten best-performing companies in the S&P 500 this year are energy companies, noted Matt Sallee, president of Turtle Capital. “Public services and midstream infrastructure will be secondary beneficiaries of the AI theme,” he said in a recent note.
There’s no better example of this investor fever than power producer Vistra Corp, the S&P 500’s top performer this year. (VST).
Shares of the Irving, Texas-based company are up 243% year to date, outperforming even AI heavyweight Nvidia (NVDA), up 186% over the same period.
JPMorgan analysts began covering Vistra on Thursday with two more Wall Street favoritesTalen Energy (TLN) and Constellation Energy (CEG) — all with an overweight rating,
Analysts said independent power producers (IPPs) are expected to benefit from a “paradigm shift in electricity demand” amid structural tailwinds such as manufacturing offshoring, electrification and the development of data centers.
“We do not see market-competitive supply growth matching this demand, allowing IPPs to achieve outsized margins for an extended period of time,” JPMorgan’s Jeremy Tonet and his team wrote.
Like Julie Hyman of Yahoo Finance underlinesrecent titles like Microsoft (MSFT) team up with Constellation Energy to restart a nuclear reactor at Three Mile Island, and Amazon (AMZN) the purchase of a data center campus from Talen Energy put Big Tech and its insatiable need for electricity in the spotlight.
But XLU’s massive performance this year begs the question: has it overachieved?
As markets as a whole reach all-time highs, it may make sense to continue investing in defensive stocks such as dividend-paying utilities, said Burns McKinney, managing director and senior portfolio manager at NFJ Investment Group .
“There seems to be a little more meat on the bone,” McKinney said, referring to more growth to come.
If XLU maintains its year-to-date gains of 29.1%, it will be the best annual level on record. sector performance.
Ines Ferre is a senior economics reporter for Yahoo Finance. Follow her on @ines_ferre.
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