As the stock market faces heightened volatility and the tech sector’s dominance becomes increasingly precarious, investors are turning to traditional sectors such as utilities, banks, and real estate for stability and dividends. The shift comes amid growing concerns over the high valuation of technology stocks and the massive demand for power from artificial intelligence (AI) data centers.
The Power Squeeze: AI Driving Demand for Utilities
The rapid rise of AI is leading to a massive increase in demand for electricity, particularly for data centers. According to Stephen Byrd, head of sustainability research at Morgan Stanley, the industry will need new data-center capacity equal to 10 gigawatts of electric power, but only about half of that is currently being built. “Seven years in the world of AI is a lifetime,” Byrd remarked, highlighting the urgency of expanding power infrastructure.
Utilities are proving to be a critical beneficiary of this demand surge. Since June, the iShares U.S. Utilities exchange-traded fund (ETF) has returned 12%, outperforming the iShares U.S. Technology ETF, which slipped by 4% over the same period. While the S&P 500 has remained relatively stable, investors are increasingly eyeing the utility sector for its stability and consistent dividends. BofA Securities notes that utilities have returned an average of 11% annually since 1980, close to the Nasdaq’s 12%, making them an attractive option as AI data centers create soaring demand for power.
Dividends Making a Comeback
In the years ahead, dividends are expected to play a more significant role in returns. Over the past decade, dividends accounted for just 16% of market returns, but they are projected to contribute closer to their historical average of 40% moving forward, according to BofA. This shift favors sectors such as utilities, which pay an average dividend of around 3%, and real estate investment trusts (REITs), which offer even higher yields.
REITs, particularly those involved in telecom towers, healthcare, retail, and data centers, have been outperforming utilities since the summer, driven by rising demand for digital infrastructure. BofA analysts recommend buying REITs, noting that the sector remains undervalued relative to funds from operations.
On the other hand, energy stocks, while offering high dividend yields, pose a risk as rising supply and slowing demand could create an oil glut in the near future, making them less appealing for income-focused investors.
Banks and Real Estate: Unlikely Winners
Banks are also emerging as a surprising winner in the search for stability. BofA has become “Overweight” on banks, citing their steady earnings and lower leverage compared to previous cycles. As interest rates fall and wages rise, consumer discretionary companies are also expected to benefit, adding further to the allure of financial institutions.
Meanwhile, the real estate sector offers opportunities for income generation, particularly in areas outside the struggling office REITs. BofA is bullish on REITs that invest in sectors such as data centers and healthcare, which continue to benefit from long-term structural trends.
Power Deals and AI: A New Frontier for Energy
AI’s growing demand for power has also created new opportunities for energy providers. Byrd points to recent moves by Amazon, which purchased a 960-megawatt data-center campus from Talen Energy, powered directly by Talen’s nearby nuclear power station. Such deals provide steady cash flow for energy companies, with Byrd predicting similar moves by other power players like Constellation Energy and Vistra.
Crypto miners, too, are finding unexpected opportunities in this landscape. As AI data centers struggle to secure power hookups, companies have begun paying miners to stop their energy-intensive operations and free up capacity for more essential services. “For a hyperscaler, which is extremely interested in getting its chips powered up, the value of time is immense,” said Byrd, noting the strategic advantage that Bitcoin sites offer in terms of quicker grid connections.
With the evolving energy landscape and the growing importance of power in the AI age, companies that can meet the rising demand for electricity are poised to thrive, offering new opportunities for both income and growth.