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Utilities AI-Fueled Rally Faces Headwinds but Upside Bias Intact

Nikos Tzabouras Written by Nikos Tzabouras

Utilities Outperformance on AI Boom

Utilities were the best performing sector of the S&P500 in the third quarter, with the relevant SPDR ETF (XLU.us) gaining around 19%. Since the start of the year, it rallies roughly 25%, rebounding from the 2022 and 2023 losses. It also beats the Technology SPDR ETF (XLK.us) this year, which boasts Apple, Microsoft and NVidia as its top holdings.

Utilities are a classic defensive play, typically preferred during times of economic uncertainty. This makes the sector an unlikely protagonist of the stock market rally, driven mainly by the AI boom. The proliferation of this energy-intensive technology leads to an expansion of data centers and a surge in their electricity consumption. The International Energy Agency electricity usage from data centers, artificial intelligence (AI) and the cryptocurrency sector could double by 2026. [1]

Highlighting these dynamics, AI leader Microsoft signed a deal with Constellation Energy (CEG.us) to restart its Three Mile Island nuclear plant, to cover its power needs [2]. Constellation's stock rallied 30% in September as a result. The Southern Company (SO.us), one of XLU's top constituents, expects annual electric load growth of 6%, driven mostly by data centers, with relevant sales having jumped 17% in Q2 [3]. Its stock gains more than 25% ytd, reaching new record highs.

The AI boom adds to the already increasing electricity needs from the transition away from fossil fuels and the proliferation of electric vehicles. Despite recent slowdown in Europe and EU, China's electrification carries forward, while IEA expects "twelve-fold" EV growth by 2035. [4]

These developments create prospects for sustained gains for Utilities and new highs, while prospects for rapidly lower rates after the Fed's jumbo pivot can support this sensitive to borrowing costs industry.

On the other hand, the Fed's easing cycle may not be as aggressive as markets expect, given the still strong economy, robust labor market and persistent inflation. Furthermore, prospects of soft landing and lower rates can turn investors toward growth sectors and erode the appeal of Utilities. Adding to the potential headwinds, the EV transition has faced pushback recently, while the AI euphoria has subsided. Despite new record highs, XLU.us is losing ground this month and a deeper pullback could ensue.

Nikos Tzabouras

Senior Financial Editorial Writer

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. With extensive experience in market analysis and a strong foundation in international relations, he brings a unique perspective to financial markets. Nikos emphasizes not only technical analysis but also on fundamentals and the growing influence of geopolitics on financial trends.

As a Senior Financial Editorial Writer, he delivers comprehensive and forward-looking insights across a wide range of asset classes, including equities, commodities, and currencies. His work explores how macroeconomic events, political developments, and global policies impact market dynamics, providing readers with a deeper understanding of both short-term movements and long-term trends.

References

1

Retrieved 08 Oct 2024 https://iea.blob.core.windows.net/assets/6b2fd954-2017-408e-bf08-952fdd62118a/Electricity2024-Analysisandforecastto2026.pdf

2

Retrieved 08 Oct 2024 https://www.constellationenergy.com/newsroom/2024/Constellation-to-Launch-Crane-Clean-Energy-Center-Restoring-Jobs-and-Carbon-Free-Power-to-The-Grid.html

3

Retrieved 08 Oct 2024 https://s27.q4cdn.com/273397814/files/doc_financials/2024/q2/SO-2024-Q2-Earnings-Call-Final.pdf

4

Retrieved 03 May 2026 https://iea.blob.core.windows.net/assets/a9e3544b-0b12-4e15-b407-65f5c8ce1b5f/GlobalEVOutlook2024.pdf

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