The surprising reason why utility stocks have suddenly transformed into the hottest sector on Wall Street

Joseph Adinolfi

This has little to do with the economy and everything to do with who will benefit from the development of artificial intelligence

Utility stocks have seen remarkable improvement over the past few months. The reason may come as a surprise.

The XX:SP500.55 sector hit a 52-week high on Thursday, after an 8.5% gain since early April that turned it into the S&P 500 SPX’s best-performing sector in the second quarter and the best-performing sector this year in the third. achieved the best results. Utilities stocks outperformed the overall large-cap benchmark index by 3% in 2024, with the sector up 19% from its mid-February low, according to FactSet data.

The sector’s growth rate has picked up over the past month. As of Thursday’s close, utility prices had risen on 15 of the last 17 trading days, the most in any 17-day period since February 2020, according to Dow Jones Market Data.

That’s a far cry from 2023, when the sector ranked last among the 11 members of the S&P 500 index.

At first glance, the improved performance of utilities companies may make some investors nervous. Typically, when defensive sectors like utilities lead the way, the rest of the market doesn’t do very well.

Given that another defensive sector, consumer staples, also hit a 52-week high on Thursday, it’s understandable that investors may be asking whether the turmoil that gripped markets in April has actually passed or whether the stock market might be ready return to last month’s slide, said Paul Hickey, an analyst at Bespoke Investment Group.

A recent series of mixed economic data that raised fears of falling into stagflation have helped reinforce these fears.

But both Hickey and a portfolio manager who spoke to MarketWatch on Thursday noted that the facts that are driving growth in the utility sector have little to do with the health of the overall economy.

Instead, the sector has emerged as the latest potential beneficiary of the artificial intelligence craze that has fueled huge profits for chip companies like Nvidia Corp. (NVDA) and other companies such as Microsoft Corp. (MSFT), which is considered to be the latest in new technology.

The first quarter earnings season showed that companies like Microsoft and Inc. (AMZN) are committing more financial resources to purchasing next-generation chips and building data centers to support the development of artificial intelligence.

These data centers will require more power, and investors believe utilities – especially those focused on clean energy and nuclear power – will benefit from the expected increase in demand.

“Developers are eager to use these types of tools,” said Alan Rosenfield, managing director and portfolio manager at Harmony Asset Management.

Among the utilities sector, the three best-performing stocks in the sector in 2024 are Vistra Corp. (VST), Constellation Energy Corp. (CEG) and NRG Energy Inc. (NRG), all of which have exposure to nuclear energy. all have seen stunning gains this year, with Vistra up over 144%, Constellation up over 84% and NRG Energy up almost 58%.

Hickey told MarketWatch that the rally in utility stocks is just another aspect of a rotation in the sector that has been ongoing throughout the year as investors hunt for value in parts of the market that are underperforming leading technology companies.

“I don’t think the utility price increase is a major warning sign for the market,” Hickey said. “It’s a rotation – some investors are looking to leverage AI and the energy demand required.”

Historically, both the utilities sector and the broader S&P 500 continued to rally after utility stocks hit their first 52-week high in more than a year, according to Bespoke’s analysis of historical data. took place earlier this week.

Over the next six months, the S&P 500 gained an average of 9.5%, while utilities rose another 6.3%.

However, there are signs that the sector is vulnerable to declines after recent spring gains. According to Bespoke, most utilities companies are listed in “extremely overbought” areas.

See: This time, rising utility stocks pose a threat to themselves, but not to the broader market

Utilities Select Sector SPDR Fund XLU is up 13.6% in 2024 from Thursday’s close at $71.34 per share. By comparison, the S&P 500 index has gained 9.3% this year, excluding dividends, and closed at 5,214 points on Thursday, according to FactSet data.

Utility stocks also outperformed the Nasdaq Composite COMP and the Dow Jones Industrial Average DJIA. The Nasdaq has gained 8.9% so far in 2024, ending at 16,346 points on Thursday, while the Dow has gained 1,698.22 points, or 4.5%, to close at 39,387 on Thursday.

-Joseph Adinolfi

This content was created by MarketWatch, operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.


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05-10-24 0826ET

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