U.S. investors are flocking to utility stocks as the event of power-hungry artificial intelligence is causing electricity demand to skyrocket and changing growth expectations for the once-staid sector.
In May and June, greater than $1.7 billion flowed into U.S. pension funds, which manage a complete of about $41 billion, the very best end in nearly two years, in line with data from Morningstar Direct.
Another $1.1 billion is predicted to flow into utility funds in July, most of it into the Utilities Select Sector SPDR (XLU) exchange-traded fund, State Street said.
Utilities often function a countercyclical shelter during turbulent times, so capital inflows into utility stocks are turning heads during a robust bull market. The stocks offer investors a comparatively low cost method to take part in the AI boom in comparison with buying costlier technology stocks like Nvidia, Microsoft and Google, where much of the gains are already in-built.
Jay Jacobs, head of thematic and lively ETFs at BlackRock within the U.S., said he expects continued investment in utility funds a minimum of this 12 months as investors search for AI opportunities beyond big tech stocks.
“Investors are looking past the Mag 7 names and waiting for the subsequent shock,” Jacobs said.
The rise of utilities comes at a time when big tech firms like Microsoft and Google are pumping billions of dollars into data centers to power AI, adding to already growing demand from the electrification of vehicles and the reshoring of producing. And AI places far greater demands on power generation than the normal computing that preceded it.
According to the International Energy Agency, an online search using an AI service like ChatGPT requires about 2.9 watt-hours of power, in comparison with 0.3 Wh for a daily Google search.
The impact of AI on U.S. energy demand forecasting prompted Churchill Management ($9.5 billion) to extend its exposure to the utilities sector in recent months. The Los Angeles-based investment adviser increased its exposure to XLU by greater than $68 million within the second quarter of 2024, in line with data compiled by Bloomberg.
“Utilities have change into a hot sector,” said Churchill President Randy Conner. “When you mix a bit little bit of every thing that has to do with AI, there’s a certain excitement.”
Shares of the biggest U.S. utilities have jumped in recent months. The S&P 500 Utilities Index is up 10.4 percent year-to-date, in comparison with -7.1 percent for 2023 and 1.6 percent for 2022. The State Street Select Utilities SPDR ETF is up about 15.3 percent year-to-date, in line with Morningstar.
The rapid increase in electricity consumption after a long time of stagnation has modified the market interest in utilities, which must invest heavily to satisfy this interest. The increasing attractiveness can also be as a result of a more favorable rate of interest environment, because the federal government's cut in key rates of interest later this 12 months could help debt-dependent utilities burdened with high financing costs.
At an electricity auction held by PJM, the biggest US grid operator, prices rose by greater than 800 percent on Tuesday in comparison with a 12 months ago. PJM, which operates the grid in 13 states within the northeastern US, said the market was sending “a price signal that ought to stimulate investment.”
Edison International, the parent company of Southern California Edison, one in all the biggest energy providers within the United States, recently increased its capital spending plans from $6 billion to $8 billion a 12 months. “We are seeing a dramatic acceleration in the expansion” of electricity demand, said Pedro Pizarro, CEO of Edison.
Three energy utilities – Vistra Corp, Constellation Energy and NRG Energy – are among the many top 10 performers within the S&P 500 this 12 months. Vistra rose greater than 15 percent on Wednesday after the PJM auction. The company, one in all the biggest U.S. power generators, is the third-best performer within the S&P 500 this 12 months behind Nvidia and Super Micro.
The renewed investor confidence in pension funds represents a “concerted turnaround” after they suffered net outflows of greater than $7.4 billion over the previous 12 months, said Matt Bartolini, head of SPDR Americas research at State Street Global Advisors.
“It's mainly a brand new business opportunity,” Bartolini said. “Utilities are inclined to be a defensive sector, and without delay it's behaving very in another way because among the macroeconomic tailwinds have modified, but in addition because among the long-term customer demand has modified.”
Over the past 20 years, electricity consumption within the U.S. has grown by lower than 0.5 percent annually, in line with Goldman Sachs. But it is predicted to rise by 2.4 percent annually from this 12 months through 2030. Utilities have responded by revising their spending plans to place money into constructing latest power generation and transmission networks.
The IEA estimates that electricity demand from data centers worldwide could exceed 1,000 terawatt hours by 2026 – double the 2022 level and a rise akin to the whole electricity demand of Germany. Microsoft announced earlier this 12 months that it’s opening a brand new data center every three days.
“Some of the numbers that utilities are releasing about electricity demand over the subsequent decade are numbers that the industry hasn't seen in a generation,” said Travis Miller, energy and utility strategist at Morningstar.
