Riding the AI computing power concept, the US utility sector has surged to become "growth stocks"

In recent years, the development of artificial intelligence has led to record highs for the S&P 500 index. This trend is transforming previously unremarkable utility stocks into investment targets with significant growth potential.

According to Zhitong Finance APP, since the end of 2023, the utility sector has risen by 44%, making it the third-best performing sector in the S&P 500 index, only behind the communication services sector and the information technology sector. These three sectors have also performed the best this year, with the utility sector increasing by 21%. Data since 1990 shows that prior to this, the S&P 500 utility index had repeatedly set historical highs in recent months but had never achieved a 20% increase for two consecutive years.

The logic behind this rebound is simple. If artificial intelligence is set to become the growth engine of the U.S. economy for the foreseeable future, then the data centers established to support its operation will require a substantial amount of energy. Therefore, utility companies that produce and sell this energy will benefit alongside companies that develop and apply artificial intelligence.

Brad Conger, Deputy Chief Investment Officer at Hirtle Callaghan & Co., which manages $25 billion in assets, stated, "We chose these independent power producers as investment targets precisely because they seem to provide a better way to realize the applications of artificial intelligence."

Perhaps unsurprisingly, the best-performing stocks in the utility index this year are independent power producers. NRG Energy (NRG.US) saw its stock price rise by 85% in 2025, placing it among the top ten in the S&P 500 index, second only to chip manufacturers Intel (NVDA.US) and AMD (AMD.US). Meanwhile, Constellation Energy (CEG.US) saw its stock price increase by 65%, and Vistra (VST.US) rose by 41%.

Until recently, utility stocks were viewed as a quiet sector in the stock market, with investors considering them as defensive investment choices due to their high dividends providing stable cash flow during economic downturns. The best year for the utility sector in the S&P 500 index was in 2000, at the onset of the dot-com bubble burst, when the index rose by 52%, while the overall S&P 500 index fell by 10%. During the global financial crisis of 2007 and 2008, as well as in 2022 when the Federal Reserve began significantly raising interest rates leading to a decline in the S&P 500 index, the utility sector also outperformed the broader market.

However, this rebound is noteworthy because it is occurring during a three-year bull market, while other typically defensive sectors have underperformed, with the consumer staples and healthcare sectors seeing increases of less than 6% this year The increase in real estate stocks (similar to utility stocks, which typically pay high dividends) is only 4.4%.

Currently, investors seem to be avoiding investments in utility stocks, partly due to their dividends. The dividend yield for this sector has dropped to about 2.6%, lower than the levels during the burst of the internet bubble. The decline in yield is due to the rapid increase in stock prices, causing investors to suddenly face high costs to buy these stocks.

Kevin Gordon, head of macro research and strategy at Jiaxing Wealth Management, stated: "It is caught in the whirlpool of momentum trading and is gradually becoming part of high beta trading. The momentum effect does not differ across different industries."

These gains have made utility stocks riskier than ever and more dependent on economic conditions. If investments in artificial intelligence slow down, or worse, are temporarily cut back, these stocks will need to be repriced like other assets related to this boom.

Conger pointed out: "If the argument for artificial intelligence is questioned, then they will be punished." Conger noted that the trading volatility in the sector has diminished its appeal as a tool to hedge against significant market fluctuations.

Conger said: "We have also built low-volatility portfolios, which typically contain a large number of utility stocks—along with healthcare, consumer staples, utility stocks, and a small number of real estate investment trusts. However, looking ahead, we will significantly reduce the proportion of utility stocks because we are aware that these stocks are now more closely associated with the cyclical characteristics of the artificial intelligence sector."

It remains to be seen whether this shift towards cyclical patterns is a long-term transformation for utility companies or merely a temporary fluctuation brought about by artificial intelligence. Meanwhile, the performance of these companies resembles that of technology growth stocks. Therefore, investors seeking safe investments will have to look elsewhere.

Louis Navellier, Chief Investment Officer of Navellier & Associates, stated: "The outlook for the utility sector is very optimistic, as demand is clearly increasing, and their price hikes have been approved by public utility commissions. I believe the utility sector will be a robust growth industry. Currently, gold stocks are undoubtedly the most defensive sector."