Utility Stocks Should Be 2024 Winners Thanks to AI
The utilities sector, known for its stable dividends and lower volatility, has experienced a challenging start to the year. While there has been a significant shift towards growth and technology stocks, leaving traditional sectors like utilities in the shadows, it may not be a sustainable trend.
In recent years, the rapid advancements in technology, particularly in the realm of artificial intelligence (AI), have fueled the growth of sectors that promise transformational potential. However, this narrative disconnect raises questions about the future performance of utility stocks.
One might argue that the initial movement towards technology stocks resulted in the underperformance of the utilities sector. But if we consider the long-term use of AI technologies, it becomes clear that there should be incredible demand for power. After all, AI is heavily reliant on electricity to power the chips and GPUs that drive its operations.
Higher interest rates have also played a role in the lackluster performance of utility stocks. Due to their capital-intensive nature and reliance on debt financing, utility companies are particularly sensitive to interest rate fluctuations. An increase in interest rates raises the cost of borrowing, potentially impacting profit margins and reducing the comparative attractiveness of utilities’ dividend yields.
However, many of these factors should already be discounted, and the disinflationary nature of AI suggests that interest rates could ultimately go lower. This discrepancy between the performance of AI-related stocks and utilities may indicate an impending correction in the market’s valuation of AI.
While AI continues to promise revolutionary changes, the underperformance of utilities suggests that investor exuberance may be outpacing practical reality. This raises the question of whether tech investors or utility investors are mistaken amid the AI mania.
Nevertheless, there is reason to believe that utilities could still be the best-performing sector of the year. As risk-off conditions resume and market volatility affects headline market averages, investors may return to these traditionally stable stocks.
In conclusion, the current underperformance of utility stocks in the face of AI mania raises concerns about the market’s valuation of AI-related stocks. However, considering the long-term demand for power and the potential for lower interest rates, utilities should not be overlooked. It remains to be seen whether investors will recognize the value that utility stocks offer in the coming years.
