Summary
Utilities are riding a wave of enthusiasm thanks to falling rates, rising electricity usage, and hopes that the sector will benefit from increased data center demand. The $18.9 billion Utilities Select Sector SPDR ETF XLU has returned 31.7% so far in 2024.
Morningstar analysts identify three tailwinds driving this rally. The biggest tailwind is the knock-on effects of the AI gold rush. Falling rates also have helped utilities rebound from poor performance coming into 2024.
The breakout star has been Vistra, up 227% in the year to date. The firm is an independent power producer getting particular attention due to its nuclear plants. Under these deals, pending regulatory approval, firms with data centers will pay a premium to access more reliable power.
Vistra trades at a 174% premium to its Morningstar fair value estimate. “We think the market is overenthusiastic about growth,” says Bischof.