Source: Zhitong Finance
The utility sector has recovered all of its losses since 2023 and rose nearly 8% in May alone. This is mainly due to the growing belief that the utility sector will benefit from the development of artificial intelligence (AI), which has contributed to recent excellent performance.
Among the 11 sectors of the S&P 500 index, the utilities sector ranked third in terms of performance this year, with an increase of 13.6%. Its corresponding$Utilities Select Sector SPDR Fund (XLU.US)$The performance was better, with an increase of 14.2%.
Currently, the industry has recovered all of its losses since 2023 and has risen nearly 8% in May alone. This is mainly due to the growing belief that the utility sector will benefit from the development of artificial intelligence (AI), thereby driving recent excellent performance.
Since the end of April, many major US utility companies have announced their latest quarterly results. Several of them mentioned that data center demand for electricity has increased to support complex artificial intelligence developments such as language learning models.
Artificial intelligence is expected to drive a 160% increase in data center power demand by the end of this decade, according to a research report released by Goldman Sachs earlier this week. Goldman Sachs predicts that to support data centers alone, US utilities will need to invest around $50 billion in next-generation power generation capacity.
“On average, ChatGPT queries require almost 10 times as much electricity as Google searches. Amidst this difference, how America, Europe, and the world will consume electricity — and how much it will cost — is about to drastically change,” Goldman Sachs said.
“The demand for power in data centers has been very stable over the years, even as their workloads have increased. Now, as the rate of efficiency in electricity use slows and the AI revolution begins, Goldman Sachs Research estimates that electricity demand in data centers will grow 160% by 2030,” the bank added.
Larry Coben, CEO of NRG Energy (NRG.US), said on the company earnings call on May 7: “For the first time in decades, and probably in 40 years since I've been in the business, we have experienced a fundamental improvement driven by demand rather than commodity prices.”
Coben added, “We, like every other forecaster I know, now anticipate significant changes in long-term electricity demand. The increase in demand can be attributed to several factors... Recent advances in GenAI are compounding and accelerating these factors, leading to the formation of the next power demand supercycle.”
Joseph Dominguez, CEO of Constellation Energy (CEG.US), stated in the company's earnings call on May 9 that “demand for artificial intelligence technology and other digital infrastructure projects is booming.”
Dominguez said, “We're seeing interest in developing projects of a scale that don't currently exist, but training systems and others need these projects to build and support the needs of all of these foundational models.”
Duke Energy (DUK.US) Chief Financial Officer Brian Savoy said during the company's earnings call that the growth of data centers has always been a “key driver” of strong growth in various regions in the commercial sector. He added that the industry is seeing “unprecedented demand” from AI data centers and chip makers.
The popularity of the utilities sector in May attracted the attention of investors and market participants, and some even called it similar to the rise in meme stocks in the past. Kevin Gordon, senior investment strategist at Carson Wealth Management, pointed out last Thursday that nearly 50% of the sector's constituent stocks have hit a 52-week high, the highest share since April 2022.
Notably, though, the rise in utility stocks occurred at a time when interest rates were at a 23-year high. As a regulated monopoly, utilities are generally viewed as low-risk investments with healthy cash flow and stable dividends. Higher interest rates are likely to impact utilities more than other industries, as it would make bonds more attractive to conservative investors looking for yield.
Additionally, in the chart below, Bespoke Investment Group highlights the recent performance gap between the utilities sector in the S&P 500 index and the utilities sector in the Dow Jones index, and points out that this is the biggest gap since the end of 2002:
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