This Under-The-Radar Defensive AI Sector Quietly Outperforms All Others, Despite Receiving ‘No Love’ From Investors

The utilities sector has emerged as the top-performing sector within the S&P 500 so far in 2024.

As of Sept. 11, the Utilities Select Sector SPDR Fund XLU has surged 22% year-to-date, outpacing all other sectors and even surpassing the technology sector – tracked by the Technology Select Sector SPDR Fund XLK – by 9 percentage points.

This marks a significant turnaround for utilities, which trailed tech by 40 percentage points in 2023.

Chart: Utilities Sector Outperforms S&P 500, Tech Stocks In 2024

The Drivers Behind The Utility Sector Surge

The robust performance of utilities stocks in 2024 has caught many investors by surprise, especially given the broader market’s focus on growth sectors like technology in recent years.

“There is an undeniable defensive undertone here, as defensive stocks like utilities and consumer staples are leading the charge. The lack of momentum in the previously unstoppable ‘Magnificent 7’ tech stocks could be signaling a shift in market sentiment,” analyst Michael Gayed.

This move toward defensive assets is particularly significant amid rising concerns over macroeconomic volatility and an increasingly unpredictable interest rate environment.

Bank of America recently raised its outlook for the utilities sector to Overweight, citing a combination of income and quality characteristics, which have become increasingly attractive as volatility rises.

“Client flows have suggested no love for the sector, but single stocks have begun to see inflows in recent weeks and ETF flows have begun to trend positively since the spring,” analysts at Bank of America highlighted.

“It’s remarkable that the most defensive sector of the S&P 500 has officially become the year’s top performer, despite the widespread consensus that the economy is doing well,” Otavio Costa, a macro strategist at Crescat Capital, said in a post on social media X.

Utilities Meet Rising Demand For AI-Driven Data Centers

Indeed, a critical factor boosting the utilities sector is the rising demand for electricity tied to the growth of AI-linked data centers.

Carly Davenport, an analyst at Goldman Sachs, highlighted this trend in a note, saying, “Data center growth is starting to contribute meaningfully to power demand, and we’ve seen further positive revisions to the pipeline.”

Goldman Sachs estimates that data centers will be the largest driver of U.S. power demand growth, contributing around 90 basis points (bps) to the nation’s 2.4% power demand compound annual growth rate through 2030.

This increase in demand is expected to lead to incremental capital investments in transmission and generation capacity, potentially driving further upside for utilities stocks over the next several years.

Top-Performing Utility Stocks in 2024

Several utility companies have experienced outsized gains this year, driven by strong earnings, strategic investments, and sectoral tailwinds. Here’s a look at the top-performing utility stocks year-to-date through Sept. 11:

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