The utilities sector, traditionally considered a haven for investors seeking regular dividends and lower volatility, started off the first week of the year strong. Since then, its performance has been abysmal. Simply put, utility stocks have crashed on a relative basis in a way that we haven’t seen since the Nasdaq tech bubble top of 2000.
We know there’s been a huge shift toward growth and technology stocks the last year. This trend has been fueled by the rapid advancements in technology and the emergence of groundbreaking innovations, particularly in the realm of artificial intelligence. As a result, sectors that promise explosive growth and transformational potential have attracted a significant share of investment, leaving more traditional and stable sectors like utilities in the shadows.
But this doesn’t really make much sense the more it continues.
Yes, it makes sense that the initial movement resulted in technology pulling away and causing the utilities sector to underperform, but you can’t have AI without electricity. And it seems the longer-term use of AI technologies would result in incredible demand for power.
It doesn’t make sense. How can we have AI mania and not expect utility companies to also be direct beneficiaries because you need electricity to power all these chips and GPUs?
Now granted, perhaps this is more about interest rates in terms of their lackluster performance as a sector. Utility stocks are particularly sensitive to interest rate fluctuations due to their capital-intensive nature and reliance on debt financing. Higher interest rates increase the cost of borrowing, which can erode profit margins and reduce the attractiveness of utilities’ dividend yields compared to safer assets like bonds. But a lot of this should already be discounted, and AI is inherently disinflationary which should cause rates to ultimately go lower.
The Bottom Line
This narrative disconnect may be indicative of an impending correction in the market’s valuation of AI-related stocks.
While AI continues to promise revolutionary changes, utilities’ performance suggests that investor exuberance may be outpacing practical reality. Utility stocks should be performing much better. The fact that they are not means someone is wrong – either tech investors or utility investors – amid AI mania.
Either way, I believe utilities still can be the best performing sector of the year, and investors will return to these stocks as risk-off conditions resume and market volatility breaks headline market averages.
On the date of publication, Michael Gayed did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
