Utility Stocks Shift from Dependable Dividends to AI-Driven Darlings

Stock News
02/19

Sophisticated investors have long bet that soaring electricity demand from artificial intelligence would generate massive profits for power companies, and recent performance confirms this view. Now, that logic has gone mainstream, pushing the sector to unprecedented heights. This year, the largest U.S. utilities ETF has surged 6.8%, easily outperforming the broader market. Once considered steady dividend payers with modest growth prospects, these "boring blue chips" have become must-have assets for nearly every institutional portfolio. Demand has grown so intense that the sector is experiencing what SentimenTrader analysts call an "extreme buying frenzy"—valuations have decoupled from fundamentals, raising the risk of a pullback. The concern is that much of the sector's growth potential may already be priced in. On February 13, NextEra Energy increased its quarterly dividend by 10%, sending its shares to a record high. The company has signed nuclear power supply agreements with Microsoft and Meta. Duke Energy and Constellation Energy have also seen their shares hit repeated peaks over the past year as they expand partnerships with major tech firms to power data centers. "The trade is extremely crowded at this point," said Mark Malek, Chief Investment Officer at Muriel Siebert & Co. "I wouldn't recommend entering here. For investors who haven't positioned yet, the window of opportunity has closed." One options trader closed a bullish position on the Utilities Select Sector SPDR ETF this past Wednesday, netting $400,000 in profit. The trade used call options betting the ETF would rise to between $47 and $52 by mid-June—a position that gained value as the ETF closed at $46.50 last week, though it has since pulled back over the last two sessions. While some traders worry the rally is nearing its peak, steadfast supporters argue that investing in utilities offers a lower-risk way to participate in the AI boom compared to betting on which company will lead in chips or consumer AI. Another source of demand comes from investors wary of high valuations in tech stocks. Many are reducing tech exposure and rotating into traditionally safer areas of the market—including utilities, healthcare, and consumer staples. "If you're thinking about exiting overheated AI names but don't want to miss the AI trend, and you see market rotation away from high-growth sectors, utilities look very compelling," Malek noted. Citi analyst Ryan Levine shares a similar view, suggesting that utilities will benefit as investors seek shelter from AI-related volatility. "Utilities are on the winning side because companies will keep investing in power plants and transmission lines. They are direct beneficiaries of accelerating capital spending, unlike other parts of the economy that may suffer," he said. Even without growth from data centers, Levine sees multiple factors supporting the utilities sector. "Increased capital spending from AI adoption, improved earnings expectations, and declining interest rates are all long-term tailwinds. That’s why we're generally more positive on regulated utilities." According to Tyler Richey, technical analyst at Sevens Report, last week's decline in long-term U.S. Treasury yields helped lift utility stocks. During periods of market volatility, Treasuries resume their traditional role as safe-haven assets, and lower borrowing costs particularly benefit utilities that rely on debt issuance to fund infrastructure projects. "The next move for utilities will largely depend on where Treasury yields go from here," Richey added.

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