When dividends are taken into account, utilities stocks are currently the S&P 500’s best-performing stocks for the year.
Although one of the most popular stories in the stock market at the moment is the artificial intelligence trade, utilities—a “boring” industry—are really outperforming Big Tech in 2025.
As of Tuesday’s market close, the S&P 500 Utilities Sector Index XX:SP500.55 has returned 23.7% so far this year, according to Dow Jones Market Data. Dividends are included in total return figures.
It is now the top S&P 500 sector for the year, outperforming the information technology and communication services sectors, which have returned 21.3% and 22.9%, respectively.
Recently, utility stock returns have been quite robust. Among the 11 sectors of the S&P 500, utilities stocks have ranked top on a performance basis over the last month and second over the last three months (after the Big Tech-heavy communication services sector), according to Dow Jones Market Data.
Nonetheless, the sector’s success may be traced back to the AI growth, which is raising energy demand to power data centers required for the training and operation of new AI models.
Travis Miller, a senior energy and utilities analyst for Morningstar, told BourseWatch, “Investors are obviously excited about the potential growth that utilities will realize as data centers get built and manufacturing comes back to the U.S.”
As recently as 2023, utilities—a historically sluggish industry recognized for its consistently increasing dividends—were the S&P 500 SPX’s worst-performing sector, recording the index’s lowest calendar-year returns. However, when utility stock prices began to rise dramatically in early 2024, something happened.
According to George Cipolloni, a seasoned portfolio manager who today oversees his own funds, investors had discovered something the industry had long lacked: a growth story.
In certain states, the demand for electricity was skyrocketing due to the construction of new data centers by Microsoft Corp. (MSFT), Meta Platforms Inc. (META), and other so-called hyperscalers to power AI technologies. According to Cipolloni, the percentage of electricity used by data centers has significantly increased in Virginia, Oregon, and other states where numerous data centers have been constructed or are in the process of being constructed. Many investors have revised their outlook on the industry as a result of power arrangements like the one announced last year between Constellation Energy Corp. (CEG) and Microsoft. Energy demand is predicted to rise sharply in the upcoming years, according to projections released by investment banks and consulting businesses, Cipolloni continued.
Cipolloni remarked, “Now there’s this growth story to it,” “Utilities and energy production will be among the largest benefactors of the explosion in AI capital expenditures. We are already witnessing it in the multiple expansion and the [stock-market] returns.”
Because they often profit from increased energy demand and favorable commodity prices, power producers such as Constellation Energy, Vistra Corp. (VST), NRG Energy Inc. (NRG), and Talen Energy Corp. (TLN) have enjoyed great stock performance this year.
According to Miller, these power-generating businesses purchase a commodity power source, such as uranium or natural gas, use it to create electricity, and then sell that electricity to their clients. This implies that they gain from rising electricity costs.
An indicator of U.S. electricity prices increased 6.2% in the 12 months ending in August, the most recent statistics available, according to official U.S. inflation data. The headline consumer-price index number increased by 2.9%, but that was a lot slower. According to government data, the cost of power per kilowatt-hour for all urban consumers in the United States was 19 cents in August, which was a record high.
However, these electricity producers are not the same as the big, heavily regulated utility firms, which have likewise experienced rapid expansion. Deals with the Big Tech corporations have become easier for companies like Constellation Energy. As more data centers are constructed, they will therefore be in a stronger position to make money.
“To the extent the data center build-out follows expectations, this will be the largest increase in electricity demand in a generation or more,” Miller stated.
The price-to-earnings ratio for the industry has increased as a result of the surge in utility names. According to Dow Jones Market Data, it reached 19.6 on Tuesday, the highest level since the start of the bull market in October 2022. Stronger profit growth has at least partially justified higher multiples for utilities equities. According to statistics from FactSet’s John Butters, the sector’s year-over-year profits growth has improved since the start of the bull market, going from negative 22.3% in the first quarter of 2023 to an anticipated plus 14.7% in the fourth quarter of 2026.
The stock of not all utility companies has increased this year. President Donald Trump’s decision to eliminate tax subsidies for solar and wind projects has impacted a few green energy companies.
For investors who don’t want to take on a lot of risk, utilities stocks are typically safer investments. This is due to the fact that consumer demand for energy is typically constant regardless of the state of the economy. People require electricity to run their homes, even during recessions.
“Utilities, meanwhile, benefit from regulated revenue streams that cushion against economic shocks,” B2Broker CEO John Murillo stated in an email.
According to Murillo, the sector’s annualized volatility over the last three years has been at 18%, far lower than the market as a whole. He advised investors who are especially worried about the trajectory of inflation in the upcoming year to have a portfolio of around 20% utilities stocks, 40% consumer staples, and 30% healthcare equities.
Utility stocks continue to make up a relatively small portion of the S&P 500, even with Murillo’s allocation. According to FactSet statistics, the proportion of utilities stocks in the S&P 500 as of Tuesday’s close was only 2.5%, whereas the two largest sectors, technology and financials, were 34.7% and 13.5%, respectively. Matt Cerminaro, co-founder of Exhibit A for Advice, a charting platform for financial advisers, calculated that utilities have contributed just 0.5% of the S&P 500’s 14.1% gain through Tuesday’s closing since the year began.
