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(Bloomberg) — Savvy investors have been betting, correctly, for years now that electricity demand for AI applications will deliver riches to power companies. All of a sudden, that wager’s blasted past the mainstream and into the stratosphere.
The biggest exchange-traded fund tracking the utilities sector has clocked a 6.8% gain so far this year, handily outstripping the broader market. Now, a group of staid socks once coveted for the reliable payouts and slow, steady growth have become a must-have for just about every investor group. So insatiable is the demand, the sector is in the midst of what analysts at SentimenTrader call an “extreme buying frenzy” that is dragging valuations away from fundamentals and risking a pullback.
The problem is, much of the growth in the sector might already be priced in. NextEra Energy Inc. hit a record high on Feb. 13 after the company raised its quarterly dividend by 10%. It’s got nuclear power agreements in place with Microsoft Corp. and Meta Platforms Inc. Duke Energy Corp. and Constellation Energy Corp. have also hit all-time highs in the past year on growing data center deals with the two big technology firms.
“It’s a pretty crowded trade right now,” Mark Malek, chief investment officer at Muriel Siebert & Co. said in an interview. “I don’t think this is a trade I would get into at this level, this is one of those things, if you didn’t get in, if you’re not already in it, the horse has already left the barn for you.”
One options trader took their chips off the table Wednesday, pocketing a tidy $400,000 profit on a long position in the State Street Utilities Select Sector SPDR ETF. The trade, using calls, was a bet that the ETF would reach between $47 and $52 by mid-June — one that grew in value as the fund ended last week at $46.50 before slipping in the past two sessions.
Even as some traders get antsy that a top might be nearing, there remain acolytes who believe power generators are a less risky way to bet on AI than trying to discern which company will lead on chips or consumer applications.
Another source of demand comes from investors worried about stretched valuations in technology stocks. They have been selling those positions and seeking safer corners of the market. Traditionally, that includes utilities, along with health care and sellers of consumer staples.
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“If you are thinking, I gotta get out of the hot AI stocks, but I still believe in the AI trade, but the markets are rotating out of these growthier areas, if you sort of mash those two together, utilities starts to look attractive,” Malek said.
Citigroup analyst Ryan Levine took a similar view, suggesting that as people flee to haven stocks on fears on AI disruption, utilities are set to gain.
“Utilities are on the winning side of that because they’re going to be spending incremental dollars around power plants and transmission and distribution wires, so they’re beneficiaries of acceleration of spend versus other areas of the economy that may become on the losing end of that narrative,” he said.Even with data centers driving growth, Levine sees other factors that will deliver upside for utilities.
“The fundamental drivers of increased capital spend from AI adoption, improving earnings growth outlooks, lower interest rates are all structurally positive for the industry, so we’ve been overall more positive on the regulated utility space,” he said.
Tyler Richey, a technical analyst at Sevens Report, says the rise in utilities stocks is a function of a drop in long-term Treasury yields last week, as US government debt returned to its traditional role as a safe harbor during market volatility. Lower borrowing costs are helpful for utilities, which tap debt markets to invest in infrastructure.
“The next steps in utilities trade are pretty sensitive to what Treasuries do from here.”
