Utility Stocks Outperform S&P 500 with 'No Signs of Recession' in Power Demand

The utility sector has emerged as a standout performer in 2025, defying the notion of an impending economic slowdown. With a 25% year-to-date (YTD) return—outpacing the S&P 500’s 20% gain—the sector’s resilience is fueled by a structural surge in power demand, driven by hyperscalers, EV adoption, and aging grid infrastructure. But is this rally sustainable, or just a temporary blip? Let’s dissect the data.

The Demand Surge: Data Centers Are the New Power Hungry Giants

The rise of AI, cloud computing, and hyperscalers has transformed data centers into voracious energy consumers. Today, they account for 4.5% of U.S. electricity use, a figure projected to nearly double to 8% by 2030. This shift has created a rare opportunity for utilities like WEC Energy (WEC) and NextEra Energy (NEE), which are securing long-term contracts to power these facilities.

Take Microsoft’s datacenter in Wisconsin, which is supported by WEC’s $335 million grid upgrade. Such projects aren’t just about infrastructure—they’re about locking in stable, high-margin revenue streams. Utilities with scale and regulatory flexibility, like Entergy Corp. (ETR), are also capitalizing: its Louisiana subsidiary recently secured a $10 billion deal to power a Meta datacenter.

Grid Modernization: A Necessity, Not a Choice

The U.S. grid, built in the 19th and 20th centuries, is ill-equipped for modern demands. Extreme weather events, EV charging, and datacenter loads have exposed its fragility. American Electric Power (AEP) and Southern Company (SO) are among those leading grid modernization, but they face headwinds.

Despite AEP’s critical role in datacenter-driven demand, its earnings forecasts have been downgraded due to regulatory hurdles and cost overruns. This underscores a key risk: utilities reliant on state regulators for rate approvals face uncertainty. Yet the long-term opportunity remains vast. Analysts estimate grid upgrades could unlock $1.5 trillion in investment through 2030, with renewables and storage comprising over 40% of that spend.

Valuations: A Discounted Opportunity or Overvalued?

Utilities trade at 18.7x next 12-month earnings, a 13% discount to the S&P 500’s valuation. Their 3.34% dividend yield—more than double the S&P’s 1.30%—adds appeal, especially if interest rates stabilize or decline.

However, near-term risks linger. ScotiaBank analysts caution that utilities may underperform as “risk-on” sentiment under a Trump administration prioritizes deregulation and tax cuts over infrastructure spending. They argue that earnings growth won’t accelerate until 2027, as regulatory approvals and project timelines drag.

The Regulatory Tightrope

Utilities like CenterPoint Energy (CNP) and Consolidated Edison (ED) must navigate rate-case decisions that could either boost returns or stifle growth. For example, Ohio Power’s recent “load ramp period” settlement—a tariff structure allowing utilities to charge datacenters for peak demand—shows how regulatory innovation can unlock value. But missteps, such as delays in rate hikes, could hurt margins.

Conclusion: A Structural Bull Market, With Speed Bumps

The utility sector’s 25% YTD return is no fluke. Datacenter demand, grid modernization, and favorable valuations form a trifecta of tailwinds. Even with near-term risks—like regulatory delays or policy shifts—the sector’s fundamentals are too strong to ignore.

Key takeaways:
- Demand is real: Datacenters alone will add 3.5 percentage points to U.S. power demand by 2030.
- Valuations are attractive: At 18.7x earnings, utilities offer a 13% discount to the S&P 500.
- Dividends are a safety net: A 3.34% yield outperforms the broader market and provides stability in volatile environments.

While utilities may face short-term volatility, the long-term story is clear: the U.S. power sector is at an inflection point. Investors should focus on companies like NextEra (NEE), Southern Co. (SO), and Entergy (ETR)—those with strong balance sheets, strategic partnerships, and regulatory agility. For now, the utility rally isn’t just about avoiding a recession—it’s about profiting from one.