Utilities were on fire this year as excitement over growing demand for AI-powered electricity boosted the sector.
Case in point: The S&P 500 Utilities ETF (XLU) is up a whopping 29% this year – the best-performing sector yet, compared to the broader index’s 23% gain.
Much of the gain comes from excitement about energy producers standing to benefit from the electrification boom – including Big Tech’s huge appetite for AI data centers and electric vehicles.
According to a recent McKinsey study, electricity is expected to be the world’s largest source of energy by 2050.
Additionally, five of the 10 best performers in the S&P 500 this year are energy companies, according to Matt Sallee, president of Tortoise Capital. “Utilities and midstream infrastructure will be secondary beneficiaries of the AI theme,” he said in a recent note.
There is no better example of that investor fever than this year’s top performer of the S&P 500, energy producer Vistra Corp (VST).
Shares of the Irving, Texas-based company are up 243% year to date, even outperforming AI heavyweight Nvidia (NVDA), which is up 186% over 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 independent power producers (IPPs) will benefit from “a paradigm shift in energy demand” amid structural tailwinds such as generation on-shoring, electrification trends and data center development.
“We don’t see the growth of competitive market supply matching this demand, allowing IPPs to capture excessive margins for an extended period of time,” JPMorgan’s Jeremy Tonet and his team wrote.
As Yahoo Finance’s Julie Hyman noted, recent headlines like Microsoft (MSFT) partnering with Constellation Energy to restart a nuclear reactor on Three Mile Island, and Amazon (AMZN) buying a Talen Energy data center campus have that puts Big Tech and its insatiable need for electricity in the spotlight.
But XLU’s tremendous performance this year begs the question: Has it reached the top?
With broader markets at record highs, it may be a good idea to continue investing in defensive stocks such as dividend-yielding utilities, says Burns McKinney, managing director and senior portfolio manager at NFJ Investment Group.
“It looks like there’s a little more meat on the bone,” McKinney said, hinting at further growth ahead.
If XLU maintains its year-to-date gain of 29.1%, it will be the best annual performance ever for the sector.
Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on X @ines_ferre.
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