The hottest sector in the US stock market: Utilities with a combination of "defense and AI"

The public utilities sector has suddenly become the hottest sector in the US stock market.

As of the close of the US stock market on Thursday, the Public Utilities SPDR ETF (XLU) closed at a 52-week high of $71.34 per share, with a cumulative increase of 8.5% since early April. With a cumulative increase of over 10% so far this year, outperforming the S&P 500 Index and the Nasdaq, the public utilities sector has become the best-performing sector this year.

In contrast, last year, the public utilities sector was once the worst-performing industry sector among the eleven sectors of the S&P 500 Index.

What are the reasons behind the strong rebound of the public utilities sector?

Defensive Stocks + AI Power Concept Stocks

Firstly, public utilities stocks are becoming the next beneficiaries of AI.

As tech giants accelerate the construction of AI data centers, the demand for electricity is also increasing.

According to data from the International Energy Agency (IEA), by 2026, the global electricity demand for data centers may soar from 460TWh (terawatt-hours, 1 terawatt-hour = 1 billion kilowatt-hours) in 2022 to between 650-1000TWh.

This is a significant positive for the public utilities sector. Some investors believe that stocks related to clean energy and nuclear power will benefit from these expectations.

It is reported that in the public utilities sector, Vistra (VST), Constellation Energy (CEG), and NRG Energy (NRG) are the top three performing stocks in the industry this year, with gains of 144%, 84%, and 58% respectively.

Bespoke Investment Group analyst Paul Hickey stated:

"I don't think the rise in utilities is a big warning sign for the market,"

"It's a rotation - meaning some investors are looking for AI concept stocks and power stocks."

Adam Turnquist, Chief Technical Strategist at LPL Financial, summarized in a report:

"Investors are starting to view this sector as a potential derivative of the AI boom."

Secondly, public utilities stocks are typically seen as defensive assets because they provide essential public services (such as electricity, natural gas, water), and the demand for these basic public services usually remains relatively stable, meaning the revenue of public utilities companies is relatively stable.

Therefore, investors often invest in public utilities stocks to hedge risks.

Since the end of last year, geopolitical risks have been escalating, global inflation remains sticky, and the heat in the AI market remains high, making public utilities stocks the best option for "both offense and defense."

Overbought?

The recent financial report season shows that tech giants are increasing their investment in data centers and AI, indicating that utility stocks are expected to continue to rise with the help of AI.

From a technical perspective, analyst Turnquist pointed out that the ratio of the Utility SPDR ETF to the S&P 500 Index has reversed its long-term downtrend, breaking above the 200-day moving average for the first time in over a year — indicating that the utility sector may further outperform the broader market.

Moreover, this sector has indeed shown an accelerating upward trend in recent days. As of Thursday's close, the Utility SPDR ETF has risen for 15 out of the past 17 trading days, marking the largest 17-day gain since February 2020.

However, there are signs indicating that the industry may start to pull back after the recent uptrend.

According to data from investment firm Bespoke, the trading prices of most utility stocks are in the "extremely overbought" territory