MW This low-risk sector has outperformed tech stocks this year - but it's still all about AI
By Gordon Gottsegen and Joseph Adinolfi
The utilities sector is benefiting from higher electricity prices and expectations for rising demand, largely driven by AI data centers
Utilities stocks are now the top performers in the S&P 500 year to date, once dividends are included.
The artificial-intelligence trade may be one of the prevailing narratives in the stock market right now, but it turns out one "boring" sector is actually beating Big Tech in 2025 - utilities.
The S&P 500 Utilities Sector Index XX:SP500.55 has seen a total return of 23.7% year to date as of Tuesday's market close, according to Dow Jones Market Data. Total-return figures include dividends.
That makes it the top S&P 500 sector year to date, better than the communication services sector (which has returned 22.9%) and information technology sector (21.3%).
Returns for utilities stocks have been particularly strong recently. Purely on a performance basis, utilities stocks are in first place among the S&P 500's 11 sectors over the past month and in second place over the past three months (second only to the Big Tech-heavy communication services sector), Dow Jones Market Data showed.
Still, the reason for the success of the sector ties back to the AI boom, which is driving increased energy demand to power data centers needed to train and run new AI models.
"Investors are clearly excited about the potential growth that utilities will realize as data centers get built and manufacturing comes back to the U.S.," Travis Miller, a senior energy and utilities analyst for Morningstar, told MarketWatch.
Sector Name YTD Total Return, including dividends (as of 10/14) Utilities 23.70% Communication Services 22.90% Information Technology 21.30% Industrials 17.60% Financials 11.50% Materials 8.70% Consumer Staples 5.20% Healthcare 4.90% Real Estate 4.10% Energy 3.80% Consumer Discretionary 3% Source: Dow Jones Market Data
Historically a sleepy sector known for its steadily growing dividends, utilities was the worst-performing sector in the S&P 500 SPX as recently as 2023, when it tallied the weakest calendar-year returns in the index. But something changed in early 2024, when prices for utilities stocks started to move sharply higher.
Investors had found something that the sector had long lacked: a growth story, said George Cipolloni, a veteran portfolio manager who is currently managing his own money.
New data centers being built by Microsoft Corp. $(MSFT)$, Meta Platforms Inc. (META) and other so-called hyperscalers to power artificial-intelligence technology were causing a dramatic increase in electricity demand in some states. Virginia, Oregon and other states where many data centers have been or are being built have seen the share of electricity used by these facilities increase dramatically, Cipolloni said. Power deals like the one involving Constellation Energy Corp. (CEG) and Microsoft, announced last year, have prompted many investors to revise their outlook on the sector. Projections published by investment banks and consulting firms show energy demand is expected to climb dramatically in the years ahead, Cipolloni added.
"Now there's this growth story to it," Cipolloni said. "As AI capital expenditures boom, one of the biggest beneficiaries is going to be energy generation and utilities. We're already seeing it in the [stock-market] returns and we're seeing it in the multiple expansion."
Power producers like Constellation Energy, Vistra Corp. (VST), NRG Energy Inc. $(NRG)$ and Talen Energy Corp. $(TLN)$ have seen strong stock performance this year, as they tend to benefit from rising energy demand and favorable commodity prices.
These power-producing companies buy a commodity power source like natural gas or uranium, use that to generate electricity, and then sell that electricity to their customers, Miller said. This means they benefit from higher electricity prices.
According to official U.S. inflation data, an index for electricity prices in the U.S. rose 6.2% during the 12 months through August, the latest data available. That was much faster than the 2.9% increase in the headline consumer-price index number. For all American urban consumers, the price of electricity per kilowatt-hour was 19 cents in August, according to government data - a record high.
These power producers are different from the large regulated utility companies, however, which have also seen strong growth. Companies like Constellation Energy have been more free to strike deals with the Big Tech companies. That means they are better positioned to profit as more data centers are built.
"To the extent the data center build-out follows expectations, this will be the largest increase in electricity demand in a generation or more," Miller said.
The rally in utilities names has helped push up the price-to-earnings multiple for the sector. It hit 19.6 on Tuesday, the highest level since the bull market began in October 2022, Dow Jones Market Data showed. Higher multiples for utilities stocks have been justified, at least in part, by stronger earnings growth. Since the bull market began, year-over-year earnings growth for the sector has improved from minus 22.3% in the first quarter of 2023 to an expected plus 14.7% in the fourth quarter of 2026, according to data from FactSet's John Butters.
Not every utility company has seen stock growth this year. A handful of green-energy companies have been hurt by President Donald Trump's decision to end tax incentives for wind and solar projects.
Utilities stocks tend to be safer investing bets for investors who don't want to take on a lot of risk. That is because energy demand among consumers tends to be stable regardless of economic conditions. Even if there's a recession, people need electricity to power their homes.
"Utilities, meanwhile, benefit from regulated revenue streams that cushion against economic shocks," John Murillo, chief business officer of B2Broker, wrote in an email.
Murillo noted that annualized volatility over the past three years for the sector is about 18%, which is well below the broader market. He recommended a portfolio of around 20% utilities stocks - along with about 40% consumer staples and 30% healthcare stocks - for investors who are particularly concerned about the direction of inflation heading into next year.
Despite Murillo's allocation, utilities stocks still represent only a modest slice of the S&P 500. As of Tuesday's close, the weighting of utilities stocks in the S&P 500 was just 2.5%, compared with 34.7% for tech and 13.5% for financials, the two largest sectors, according to FactSet data. Since the start of the year, utilities have contributed just 0.5% of the S&P 500's 14.1% advance through Tuesday's close, according to calculations from Matt Cerminaro, co-founder of Exhibit A for Advice, a charting platform for financial advisers.
Ken Jimenez contributed.
-Gordon Gottsegen -Joseph Adinolfi
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October 15, 2025 13:11 ET (17:11 GMT)
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