The flashiest, best performing sector this year is... utilities?
Utilities stocks are up 27% in 2024, even better than tech
The stock market story of the year has been all about artificial intelligence (or maybe the Fed, if you’re more of a “zoom out” person).
But, despite Nvidia’s inexorable rise and the ongoing dominance of the Magnificent 7, it’s good old fashioned utility stocks — think electricity, water, and gas companies — that are leading the market this year, up more than 27%. That’s better than the Information Technology (+26%) or Communication Services (+25%) sectors.
So, why are utility stocks soaring?
We never know exactly why any stock is doing anything, but in this case the market seems to be seeking exposure to utilities for two reasons. Firstly, after years of tighter monetary policy, we’re close to getting a cut in interest rates, lowering the borrowing costs for utility companies, as well as making their high dividend yields relatively more attractive to income-seeking investors.
The second reason is more fundamental. Many utilities stocks are indirectly exposed to AI (and you thought this story was about something else), by powering the ever-growing demand for data centers.
In fact, the best performing stock in the Utilities sector of the S&P 500 is a little-known company called Vistra Corp., which only joined the index in May, and has soared more than 130% this year. The second-best performing is Constellation Energy Corp. (+71%), which is America’s largest owner and operator of nuclear power plants.
Unsurprisingly, the management of these companies are talking up the opportunity:
The simple fact is that data centers are coming and they're essential to America's national security and economic competitiveness. We've heard this from a variety of policymakers, a number of nations, including China, are vying for AI supremacy. And it's absolutely critical that the US not fall behind. Time is of the essence. We simply cannot wait years for the data centers that are going to bring transformations. They're going to bring transformations in medicines, bringing new cures to diseases and treatments that research alone cannot do.
Joseph Dominguez — Chief Executive Officer, Constellation Energy Corp [August 6th, 2024]
Altogether, the words “data center” were mentioned 35 times on Constellation Energy’s Q2 earnings call. The count for the same quarter last year? Zero mentions.
