By Jacob Sonenshine

Utility stocks can do no wrong right now -- and more gains could be on the way.

It's not just that utilities are having a great year, though they are. The Utilities Select Sector SPDR exchange-traded fund is up 20% this year, outperforming the S&P 500's 15% rise. It's how they're going about it. Utilities are typically thought of as defensive stocks, offering downside protection when markets sell off due to their steady-Eddie businesses and attractive dividends.

They've lived up to that reputation this year. Out of the 80 down days for the S&P 500 in 2025, which has seen the index drop an average of 0.82% for the day, utilities have averaged a decline of 0.26%, and finished higher on the day 35 times.

But utilities aren't just for safety anymore. Thanks to the demand for energy to power artificial-intelligence data centers, the group has become linked to the AI trade, whether it's nuclear utilities, such as Constellation Energy and Vistra, which have deals with the big hyperscalers to provide energy, or more traditional utilities, including Virginia's Dominion Energy and California's PG&E, which supplies power for Microsoft's San Jose data center. That means it's been providing offense too -- utilities are the second-best-performing sector this year, behind only technology -- even as other defensives lag, including consumer staples, real estate, and healthcare.

The dual nature of utilities was on display in what has been a back-and-forth week so far. On Monday, the group rose 1%, nearly as much as the Roundhill Magnificent Seven ETF's 1.4%. That was followed by a 0.5% rise on Tuesday, even though the Magnificent Seven ETF fell 1.1% on concerns that recently struck AI deals wouldn't be profitable for Big Tech companies. Then it was back to offense on Wednesday, when utilities were the third-best-performing sector on a big day for the AI trade.

Expect that trend to continue for at least the rest of the year. The group trades at just under 19 times 12-month forward earnings, more than four points lower than the S&P 500's 23 times, one of the steeper discounts to the index over the past three years. But utilities are far from the slow-growth sector that they have historically been. Analysts expect earnings to grow by nearly 9% a year over the next two years, based on annual earnings-per-share growth for the ETF, according to FactSet, up from 4.2% annually for the 10 years ended in 2024.

The faster growth reflects demand from data centers, electric vehicles, and other sources, as well as the buildout of clean energy, which allows them to increase the number of plants that they use to serve -- and charge -- consumers.

American Electric Power, which serves Texas, Virginia, and Ohio, looks particularly interesting. Those three states are chock-full of data centers, which means the company is "poised to meaningfully and incrementally benefit from continued data center and large load development," writes Evercore ISI analyst Nicholas Amicucci.

Analysts expect American Electric to gradually increase its asset base over the coming years to serve these data centers, and to boost revenue by almost 6% annually from the end of this year through 2028 to $25.2 billion. That could strengthen profit margins, sending earnings per share up almost 7% annually through 2028.

Combine that with a 3.2% yield and the likely growth of its dividend, and American Electric's total return could reach the double digits annually. That's not bad, especially considering the relative safety the stock provides. For investors looking for offense and defense, AEP could provide a lot of utility.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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October 09, 2025 01:00 ET (05:00 GMT)

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