Fidelity Select Utilities Portfolio Bets on AI-Powered Grid Modernization as Capital Spending Super-Cycle Kicks In

The Fidelity Select Utilities Portfolio's recent move aligns with a broader sector shift from defense to offense, driven by a powerful new growth narrative. Last week, the portfolio's price rose 0.86%, a modest gain that fits within a year of strong momentum. That momentum was clear in 2025, when the broader utilities sector returned 16.0%. This performance marked a significant departure from the sector's traditional defensive role, as accelerating AI-driven power demand fueled growth throughout the year.

The portfolio's investment approach is explicitly designed to capture this offensive shift. Its strategy favors companies with durable earnings growth, a thesis that directly targets the utilities positioned to benefit from AI expansion. Holdings like NextEra Energy and NRG Energy exemplify this focus, as they are building the power generation and grid infrastructure needed to support the surging demand from data centers. The core of the AI demand thesis is straightforward: power is the essential "feedstock" for AI servers, and the sector's response-with record capital investment-is creating a new growth cycle.

While the sector pulled back late last year amid concerns over affordability and potential regulatory intervention, the underlying demand story remains intact. The portfolio's positioning is a bet on the durability of that load growth, which is projected to inflect higher from 2026 through 2032. For now, the results show the market is rewarding this thesis, with the utilities sector outperforming the broader market in 2025 and the portfolio continuing to climb.

Capital Constraints: Can Utilities Build Fast Enough?

The AI demand thesis hinges on a simple equation: growth in power needs must be matched by growth in supply. The sector's response is a massive, multi-year capital build-out, but the speed and scale of execution are the critical unknowns. Duke Energy's announcement of the largest capital spending plan of any regulated electric utility in the U.S. sets the tone for a utility super-cycle. This isn't just about building more power plants; it's a full-scale modernization effort, with transmission upgrades, grid hardening, and wildfire mitigation consuming a major share of the budget. The sheer scale of this investment is a direct signal that the industry views the coming demand surge as structural, not temporary.

Yet, even with this unprecedented spending, supply-side bottlenecks are emerging. Gas-fired generation, seeing a resurgence in interest from data center operators, is hitting a physical constraint. The companies building the turbines to power these plants are already facing significant backlogs. This creates a tangible lag between the decision to build and the actual delivery of new capacity, potentially delaying the sector's ability to meet peak demand spikes.

The bottom line is that the sector's ability to satisfy projected growth depends entirely on executing these complex, multi-year investment plans. The long-term demand trajectory is clear, with power demand projected to grow 38% between 2020 and 2040. But that growth is not guaranteed to materialize on schedule. The capital plans are the necessary fuel, but the path from plan to power is fraught with execution risks-from permitting and labor to the very manufacturing backlogs now visible in the gas sector. For the portfolio's AI thesis to hold, utilities must not only spend the money but spend it wisely and on time.

Affordability Pressures: The Earnings and Dividend Risk

The sector's defensive character provided a cushion early in 2025, but that protection is now being tested by persistent cost pressures. As utilities invest heavily to meet AI demand, they are actively working to shield their earnings from the resulting bill shocks. A key tool in this effort is the use of large load tariffs, which companies highlighted in their fourth-quarter earnings to address affordability concerns. These tariffs are designed to pass through rising costs to ratepayers, protecting utility margins from the direct impact of higher fuel and capital expenses.

Yet, this cost pass-through is not a guaranteed shield. The political landscape has grown more hostile, with utility bills becoming a focal point in recent state elections. In November 2025, gubernatorial campaigns in New Jersey and Virginia made affordability a central issue, signaling heightened regulatory scrutiny and potential pushback against rate hikes. This political risk introduces a new layer of uncertainty, as regulators may limit the speed or size of approved price increases, directly challenging the earnings power of companies that have raised capital spending plans.

The bottom line is that the sector's ability to deliver on its growth thesis depends on navigating this dual pressure. On one side, utilities need to raise capital and pass through costs to fund their massive build-out. On the other, they must manage political and regulatory backlash to maintain the rate increases that make those investments profitable. The defensive earnings profile that once defined utilities is being replaced by a more volatile setup, where dividend sustainability now hinges on a successful, and politically acceptable, cost recovery. For the portfolio, this means the AI-driven growth story carries an embedded risk that earnings and dividends could be constrained if affordability pressures lead to regulatory intervention.

Catalysts and Scenarios for 2026

The path forward for the Fidelity Select Utilities Portfolio in 2026 will be determined by a handful of concrete, measurable factors. The AI demand thesis is now a multi-year investment cycle, and its success depends on execution, policy, and supply chain resolution. Investors should watch for three key catalysts.

First, monitor utility earnings reports for updates on capital expenditure execution and tariff approvals. The sector's ability to fund its massive build-out is directly tied to its financial health and regulatory standing. As seen in the fourth quarter, companies are actively using earnings calls to highlight their efforts to address affordability, including the implementation of large load tariffs. These mechanisms are critical for passing through rising costs to ratepayers, protecting margins. Any delays or pushback on tariff approvals from regulators would be a direct signal that the cost recovery needed to sustain high spending is under threat.

Second, watch for policy changes that could impact renewables investment or power prices. While renewables remain a standard part of utility resource planning, they have taken a hit from federal policy shifts. The direction of future policy on clean energy incentives, permitting, and carbon pricing will influence the pace and cost of the energy transition. This, in turn, affects the economics of new projects and the overall mix of generation. Additionally, broader energy and climate policies can influence wholesale power prices, which are a key driver of utility revenues and profitability.

Finally, track the resolution of turbine manufacturing backlogs and their effect on project timelines. The resurgence of interest in gas-fired generation, driven by data centers, has exposed a physical constraint in the supply chain. Turbine manufacturers are already facing significant backlogs, creating a lag between project announcements and the delivery of new capacity. The speed at which these bottlenecks clear will directly impact how quickly the sector can bring new power online to meet projected demand. Delays here could tighten supply during peak growth periods, potentially amplifying price volatility and regulatory pressure.

The bottom line is that 2026 will be a year of validation. The portfolio's AI thesis is built on a foundation of record capital spending, as exemplified by Duke Energy's claim to the largest capital spending plan of any regulated electric utility in the U.S. But that spending must translate into tangible capacity additions and stable earnings. The catalysts are clear: watch the numbers in quarterly reports, the direction of policy, and the progress on manufacturing. The portfolio's performance will hinge on how these factors align.