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While Nvidia (NVDA) has grabbed the headlines this year — most recently when its market cap topped $3 trillion — the AI halo effect has boosted an unlikely industry.
Utilities are typically known as one of the more boring sectors of the market. In a regulated industry whose rate structures are determined by states, power companies aren’t known for big growth. They’re seen as defensive because demand for electricity remains relatively constant through economic cycles.
Enter AI and the nearly insatiable power demand that comes with data centers.
“With the AI rush emerging here, power companies are the ones selling shovels into this gold rush,” Sophie Karp, KeyBanc equity analyst, told Yahoo Finance.
The S&P 500 Utility Index has rallied more than 10% this year, behind only Communications Services and Information Technology. Texas power company Vistra (VST) has led the way, more than doubling and following only Nvidia (NVDA) itself and Super Micro Computer (SMCI) on the S&P 500 year-to-date leaderboard. Coming in at No. 4 is Constellation Energy (CEG) with a nearly 70% gain.
Karp said that despite those gains, valuations for power companies remain at historically attractive levels as earnings have kept pace.
There’s one potential circuit-breaker in the story, though — and that’s power capacity.
Canaccord Genuity’s George Gianarikas raised the issue in a recent note: “What we question is how quickly the energy infrastructure to support AI can be built to support the growth aspirations of the data center companies building the infrastructure.”
If the power companies can somehow provide, expect big things. But if not, Gianarikas wrote, “expect a period of digestion for AI-related hardware. Something's got to give.”
Karp, for her part, brushed aside these concerns, saying it’s more of a timing issue than a bigger problem. In some regions, she said, capacity is already abundant. In others, more capital investment and time will be needed to bring more power on line.
Regardless, utilities may have another important catalyst coming — a decline in interest rates. Power stocks tend to trade inversely to yields, so if they go down either before or when the Federal Reserve (finally) starts cutting, that could be yet another hair-blowing wind for the newly sexy sector.
Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9 a.m.-11 a.m. ET. Follow her on Twitter @juleshyman, and read her other stories.
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