AI a key driver of the power outlook
Expectations of rising power demand due partly to artificial intelligence (AI) are driving market volatility. We favor AI beneficiaries in utilities and infrastructure.
U.S. stocks rose last week, with mega cap tech headlining strong Q4 corporate earnings. Bond yields spiked on the hot U.S. CPI data but ended the week flat.
We get UK CPI this week. We think the UK’s weaker growth outlook paves the way for further Bank of England policy rate cuts.
We see structural shifts like AI transforming economies and driving energy demand. Case in point: 2024’s surge in typically dull utility stocks and other AI related companies. News of a seemingly more efficient AI model by China’s DeepSeek briefly interrupted this rally. We don’t see DeepSeek’s innovations hurting power demand, nor do the large AI builders. AI is one of many factors driving greater energy demand. We eye beneficiaries in utilities and infrastructure.
Buzz about utilities
Returns for selected AI-exposed utilities versus the S&P 500, 2024-2025
We see a transformation underway potentially requiring investment on par with the industrial revolution. This can drive market volatility, as we have seen. One example: markets keying on AI’s power needs triggered a surge in AI-linked stocks last year, pushing the usually staid utilities sector higher. DeepSeek briefly challenged that trade last month on fears that heavy AI capex, and estimates of AI’s power needs, may be overdone. See the chart. Yet the selloff quickly reversed, a sign markets now share our view that while DeepSeek could deliver efficiency gains, new frontiers – like artificial general intelligence that matches or surpasses human abilities – will likely still require large investment. Plus, AI efficiency gains could accelerate the AI mega force, creating the need for more energy and the infrastructure to support it. That’s backed up by mega cap tech’s plans to stick with and even increase AI capex.
In the U.S., where AI is shaping up to be a key driver of new power demand, estimates of the scale of the nation’s total power needs are huge and growing. Q4 corporate earnings season shows the mega cap tech companies driving the AI buildout are largely sticking with their AI capex, even after the DeepSeek news. Some are even increasing on last year’s spend – Meta, Amazon, Microsoft and Alphabet are expected to invest nearly $320 billion in AI capex this year, up roughly 40% from 2024, according to company guidance. The AI buildout could drive power demands further afield, too: many governments are joining U.S. companies in their AI commitments – as seen in the $500 billion U.S. Stargate project and the European Union’s €200 billion AI bet announced in Paris last week.
Yet AI is only part of a broader trend of growing power needs globally. Other drivers include rising global incomes, reshoring, industrial growth and building cooling needs. Extreme heat is driving air conditioning use, particularly in emerging markets where it is not yet widespread. Electrification of buildings and vehicles is expanding, though unevenly across regions. We expect speedbumps as soaring demand runs up against power supply constraints, potentially adding to inflation pressures. This calls for upping allocations to equities, infrastructure and inflation-linked bonds as an inflation hedge, we think.
Assessing what type of power will meet this spiking power demand is key, we think. Already huge investment expected in the energy transition could grow further, in our view. The companies driving the AI buildout prefer power supplies that are always on, cost-effective, immediately available and low carbon, a difficult combination. That could drive U.S. demand for natural gas and renewables. Yet we still see a role for traditional energy as policymakers seek affordable and reliable power alongside low-carbon goals. Longer term, demand could rise for nuclear and other low-carbon, available-when-needed energy sources. We eye investment opportunities across power generation, grid infrastructure and the electrical equipment value chain. We like utilities and power producers in this environment and get granular to identify opportunities along the supply chain.
Bottom line: We see soaring power demand driving bouts of market volatility. We get active to find investment opportunities – like in utilities, grids and electrical equipment supply chains – and value selectivity as performance dispersion grows.
Market backdrop
U.S. stocks rose last week, taking the year’s gains to 4%. Yet they again lagged European shares – now up 9% this year, led by financials. Q4 earnings season stayed strong on solid results and AI capex guidance by mega cap tech. U.S. CPI pointed to sticky inflation, causing U.S. 10-year Treasury yields to spike before settling back near 4.47%. Persistent inflation reduces the odds of more Federal Reserve rate cuts this year, we think. Hong Kong-listed Chinese shares surged largely on AI optimism.
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