Looking Beyond the Technology Sector for AI Impact

We’ve written before about the impact Artificial Intelligence (AI) is having across markets. The build-out of large language models (LLMs) has to date required hundreds of billions of dollars of new investment, and the Technology sector has been leading markets higher for years.

But it’s also fair to say that the trade is feeling a bit crowded.

In the S&P 500 Technology sector, for instance, the top 10 companies make up 77% of the market capitalization, and many of those companies trade at eyebrow-raising valuations. If you zoom out from that category and just think about growth stocks in general, you’ll find that growth stocks made up over 35% of the S&P 500 Index as of the end of last year. That’s substantially above the historical average of 24%.

This is not to say that it’s time to pivot away from the AI theme, tech stocks, and/or growth stocks. But it may be time to consider other areas of the market that could feel AI tailwinds, but that also trade at lower multiples.

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Utilities and Energy could be a place to look.

For one, AI is driving a surge in electricity demand. AI systems require massive computing power, particularly for training and running complex machine learning models. This has led to a sharp increase in energy consumption in data centers, which serve as the backbone for AI applications.

Utilities could be a beneficiary of this demand. Utilities stocks were beaten down in 2023, as capital- and investment-intensive businesses tend to feel the pain of higher interest rates. The shifting outlook for interest rates in 2024 arguably helped drive a rebound last year, but now investors are considering the longer-term impact that AI development could have on electricity consumption. If the proliferation of AI-related spending takes hold as we anticipate it will, power demand could grow significantly. By some estimates, electricity demand from data centers alone could grow by 15% annually over the next decade.

Rolling 12 Month Total Net Electricity Generation (thousand megawatt hours)

Additionally, as AI models grow in sophistication, the amount of electricity needed to process and store data should also rise significantly. Some estimates suggest that AI-related workloads consume multiple times the energy of traditional data center operations. This growing demand places additional pressure on electricity grids, especially in regions where AI-driven industries are expanding rapidly.

There’s a supply-demand argument tied to AI and the Utilities sector, but investors should also consider the efficiencies that AI may be able to drive. Indeed, one of AI’s most significant contributions to the energy sector is its ability to enhance efficiency in power distribution and grid management. AI-driven algorithms analyze large sets of real-time data to predict electricity consumption patterns, allowing energy providers to optimize power generation and minimize waste. These insights help utilities balance supply and demand more effectively and can help reduce costs—which factor as positives for earnings.

Beyond forecasting, AI is also improving grid reliability through predictive maintenance. By continuously monitoring infrastructure such as power plants, transformers, and transmission lines, AI can detect potential equipment failures before they occur. This proactive approach reduces unplanned outages, lowers maintenance costs, and extends the lifespan of critical energy assets.

Looking ahead, AI is expected to play an even greater role in shaping the future of the utilities and energy industries. As technology advances, AI-driven solutions will become increasingly sophisticated, helping to create smarter grids and improving energy storage systems.

In the coming years, AI’s impact on energy will continue to evolve, influencing everything from power generation to consumption patterns. Investors would be wise to monitor these changes.

Bottom Line for Investors

AI’s rapid expansion is poised to substantially increase electricity consumption, creating a potentially significant growth opportunity for companies in the Energy and Utilities sectors. As AI adoption accelerates across industries—powering everything from data centers to automated industrial processes—the demand for reliable and large-scale electricity supply will likely continue to surge. This increased energy consumption could translate into higher revenues for utilities and power providers, as businesses and technology firms require more electricity to sustain their AI-driven operations.

That being said, to fully capitalize on this growing demand, utilities will need to invest heavily in infrastructure upgrades. Expanding power generation capacity, modernizing grid systems, and strengthening transmission networks will be critical to ensuring a stable and efficient energy supply. These investments can be capital-intensive, requiring significant upfront costs and long-term planning—which could cut into earnings growth. Investors need to be mindful of this as the theme continues to play out.

In recent years, passive investing has become a popular approach, allowing virtually every investor to participate in the stock market with an ETF index fund that tracks the S&P 500.

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¹ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

² Strategas.

³ Zacks Investment Management may amend or rescind the A Better Way Forward: Actively Managing Passive Index Funds guide offer for any reason and at Zacks Investment Management’s discretion.

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