Riding the Wave: How AI-Driven Data Centers are Boosting Defensive Utility Stocks
As global investment preferences shift, the Utilities SPDR ETF ( $Utilities Select Sector SPDR Fund (XLU.US)$) led the US stock market in May, recording a 6.79% gain this month, with a year-to-date return of 13.47%, outperforming the S&P 500 and Nasdaq and propelling the utility sector to be the best-performing sector so far this year.
The US stock market has accelerated its rebound from the April slump, but there has been a noticeable change in market preferences. Investors are closely watching the strong performance of utility stocks, and there are several reasons for this:
1. High uncertainty in the macro environment has highlighted the value of defensive sectors
As demand for basic public services such as electricity, natural gas, and water typically changes little, and most utility companies are regulated monopolies, their revenue is relatively stable. Therefore, utility stocks are often seen as defensive assets. Since the end of last year, geopolitical risks have been rising and global inflation remains sticky, while the AI market is still "hot." As a result, utility stocks have become the best "offensive and defensive" option.
2. The AI boom is boosting electricity demand
As tech giants accelerate the construction of AI data centers, electricity demand is also rising. This is a major positive for the utilities sector, especially for stocks related to clean energy and nuclear power.
The latest analysis from Morgan Stanley points out that in the entireAIvalue chain, there is the least risk of excess power capacity in the electricity sector. The report notes that DC power demand has emerged as a sudden development for power and utility companies that typically operate with predictable changes in demand. However, in the longer term, key risks arise around non-AI power demand in DC-dense areas and the potential for energy efficiency improvement in the equipment powering AI.
Electricity demand is expected to continue in the future. Goldman Sachs predicts that from 2023 to 2030, the compound annual growth rate of power demand from data centers will reach 15%. By 2030, the proportion of electricity demand from data centers in the US will increase from the current 3% to around 8%.
3. Valuation factors provide buying opportunities for utility sectors
Recently, some Wall Street strategists have stated that after experiencing a lackluster performance at the beginning of 2024, the utility sector, as alow-valuesector, may at least catch up in the short term.
Keith Lerner, Co-CIO of Truist, believes that as one of the worst-performing stock market sectors in the S&P 500 since last year, the utility sector's valuation relative to the overall discount rate of the S&P 500 in March was the largest difference since 2009. "With markets up so much as we're up since October, people get nervous," Lerner added, "They want to rotate into something a little more defensive."
"Positioning has rarely been this extreme. I believe a rotation is going to take place. It could be violent and will inevitably reward the laggards," said Alberto Tocchio, Head of European Equity and Thematics at Kairos Partners SGR. " Commodities, utilities and small caps are the three areas which I would start to overweight. And we have already started to do so across our funds," he added.
Which stocks are leading the utilities sector?
Among utility stocks, $Vistra Energy (VST.US)$, $Constellation Energy (CEG.US)$ , and $NRG Energy (NRG.US)$ are the top three performers in the industry this year, all with annual gains of over 50%.
The sustainability of the strong rally in utility stocks is in question
The valuation of utility stocks has made their dividends appear less attractive. As utility stock prices have risen, expected dividend payments have not grown as much, leading to a decrease in dividend yield. The utility ETF's aggregate dividend payment for the coming 12 months yields just 3.2%, down from close to 4% at the start of the rally, which is even lower than the 4.89% yield on 10-year US Treasury bonds. Besides, according to data from investment firm Bespoke, most utility stocks are currently trading in the "extremely overbought" zone.
Charles Schwab's senior investment strategist, Kevin Gordon, suggests that although Utilities have seen an upward trend, it is uncertain whether this defensive play will continue. "That's not really sending me a clear message as to whether the markets risk on or risk off," Gordon said.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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10baggerbamm : all these so-called experts they're late to the game as usual typically they downgrade at a bottom and upgrade at a near top. I was buying utsl pounding the table telling people to buy it at $14 and hit 29 this past Friday. now I'm buying DRN..ETF, 12 months this is going to be north of $20. for the most undervalued individual stock equity in the US marketplace...its KNDI. TRADING AT 1.6 TIMES REVENUE IT'S RIDICULOUS THE COMPANY IS NOW PROFITABLE THE COMPANY BOUGHT BACK 30 MILLION WORTH OF STOCK THE FIRST QUARTER IN THE OPEN MARKET 4TH QUARTER LAST YEAR THE COMPANY COMPLETED ITS US DISTRIBUTION NETWORK THE US MARKET SHARE GREW OVER 50% LAST QUARTER REVENUE GROWTH. the stock's been over $20 in the past when it was nowhere near as well run and able to execute like they are today.. this company should be trading at a minimum 5 to 10 times revenues right now which would put this stock between 10 and 20 and once people realize what it is they just got to deal with the NFL the right to use their marketing and they're building EVS tagged with all the NFL teams it just was announced this past weekend they're growing their executing and rather than Chase yesterday's hero nothing wrong with Microsoft I own it I've owned it 20 years but I'm not going to get tenfold price increase in Microsoft in 2 years or one year and I believe I will in kndi.