Utilities sector

America has reached an exciting inflection in power demand and the outlook for utilities is bright. Electrification and the growth of artificial intelligence are driving a potential once-in-a-generation opportunity for exponential growth in the sector. 

After a decade of anemic growth in power demand of roughly 1% to 2% annually, these multiyear trends are propelling power demand growth estimates for utilities up to 6% to 8% annually over the next 10 years. This growth in power demand has the potential for improved earnings growth and durable multiple expansion for utilities. 

Surging demand launched utilities to the top in 2024 

As we began the calendar year 2024, the utilities sector was trading near its lowest valuation since 1999, at a roughly 15% discount to the S&P 500^®. Elsewhere, the stocks of higher-growth-oriented companies, deemed the best positioned to benefit from the boom in generative artificial intelligence, were dominating U.S. stock markets. 

Throughout the year, the market’s perception of utilities shifted slowly but dramatically, mainly due to the potential boost from AI and energy demand needed to support this burgeoning area of technology. When the market began to recognize how potent a growth driver this could be for the sector, utilities with exposure to AI rallied solidly. 

A notable uptick in volatility also benefited the utilities sector. Continued concerns about the strength of the U.S. consumer and economy, as well as the magnitude of anticipated dips in U.S. interest rates helped boost returns for utilities in 2024. Historically, utilities have had the least economic sensitivity among the 11 equity market sectors. In addition, the sector has historically had a lower beta relative to other sectors to the broad market—meaning it is less correlated to broad equity market movement. These qualities proved attractive to investors during a dynamic year.

Strong tailwinds for utilities 

Artificial intelligence. The rapidly developing technology of artificial intelligence is proving to be a significant boost to predicted energy demand over the next decade. AI requires immense computational power, storage space, and low-latency networking for training and running models. These applications are usually hosted in data centers. As AI continues to become more ubiquitous, the energy demands from data centers will grow exponentially, which I believe will translate to higher earnings growth for certain utilities. 

Driven by these trends, energy demand is forecasted to grow over 38% over the next 2 decades. Regulated utilities will need to build new power plants to satisfy this surge in demand. Deregulated utilities should also benefit. As reserve margins are tightening, power prices for existing energy should also increase. 

The primary risk to this uptick in growth for utilities is regulatory. The U.S. government will be looking to keep electricity pricing affordable and accessible for consumers and businesses. At the same time, a new administration will come into power in 2025, which could impact government funding through subsidies and certain tax credits. 

Sustainably rising demand. Since the mid-2000s, electricity demand has been flat, mainly due to increases in energy efficiency. As the U.S. began to transition its energy fleet away from coal-fired plants to renewable energy sources in the last decade, the outlook for energy demand—and utilities—began to brighten. The government, businesses, and consumers are turning to electricity to fuel their vehicles, homes, workplaces, and factories. In 2022, the U.S. began seeing power demand sustainably rising for the first time in over a decade.

That said, these durable trends will continue to push energy demand higher regardless of any shifts in governmental leadership in the U.S., and there are several companies that may be poised to benefit from them. Many of these utilities are in the electric utilities, independent power producers & energy traders, and renewable energy groups. 

A once-in-a-generation opportunity for growth potential 

As these powerful trends gain traction and energy demand spikes over the next 2 decades, utilities will experience a once-in-a-generation opportunity to grow exponentially. The transition of the power fleet to electrification and the growth of AI are each multiyear, durable trends that will help utilities drive growth not only in 2025, but also in the many years to come.