Has the US stock market AI trading ended? Chip stocks "cooled down", while utility stocks did not!

Recently, while chip stocks in the US stock market have been falling, utility stocks have been rising against the trend.

The US stock market Utilities Select Sector SPDR Fund (XLU) has surged by 4% in the past 5 trading days, breaking through the $74 mark in one go. The utility sector may be heading towards a brighter future.

Over the past two years, due to market concerns about persistent inflation, the Federal Reserve has kept interest rates at a relatively high level after continuous rate hikes, with the yield on 10-year US Treasury bonds mostly staying above 4%.

According to FactSet data, during this period, the average return on utility stocks was 3.4%, with dividend yields even lower than those of government bonds, putting pressure on utility stocks that rely on stable dividends.

XLU has also been unable to break through the $72 mark, while major US indices have seen double-digit growth during the same period.

However, starting from last week, the situation may be reversing. Amid the general decline of tech stocks like Mag 7, the utility ETF XLU has risen against the trend and broken through key levels, indicating that investors have more confidence in holding utility stocks.

US Economic Slowdown + AI Boom Trigger Surge in Power Demand, Turning the US Utility Sector Around

Some analysts point out that factors driving this change include: the weakness in US macroeconomic data and the surge in power demand triggered by the AI boom.

On the macroeconomic front, weak non-farm employment data in July in the US, gradually rising unemployment rate, coupled with July ISM manufacturing PMI data falling short of expectations, have raised concerns about a US economic recession. The market widely expects a Fed rate cut in September, with the 10-year Treasury yield dropping to around 3.8%, making dividend yields of utility stocks more attractive.

On the other hand, the surge in power demand triggered by the AI boom has also driven the rise of US utility stocks.

Last Tuesday, at the electricity market auction held by PJM, the largest electricity grid operator in the US, prices soared to $269.92 per megawatt-hour, an increase of over 800% from a year ago, also breaking the record of $174.11 per megawatt-hour in 2010.

One of the largest electricity companies in the US, Vistra, saw its stock price rise by over 15% after this news.

Goldman Sachs warned that more power capacity is needed for grid stability. However, any new grid expansion may take several years to come online, which basically means that prices will remain high for a period of time.

Therefore, companies like Vistra, Constellation Energy, and NRG Energy, three utility companies, have become among the top 10 best-performing companies in the S&P 500 index, riding the wave of soaring electricity prices.

More importantly, compared to buying high-priced tech stocks like NVIDIA, Microsoft, and Google, investors can now participate in the AI boom by buying utility stocks at relatively cheaper prices BlackRock's active ETF manager Jay Jacobs said that as investors look beyond large tech stocks for artificial intelligence opportunities, it is expected that at least this year, investors will continue to invest in utility stocks or related ETFs.

Investors have already looked beyond Mag 7 and are waiting for the next opportunity. With large tech companies like Microsoft and Google investing billions of dollars in AI data centers, powering corresponding AI devices, and the rise of new energy vehicles, the rise of utility stocks is a natural fit.

Churchill's president Randy Conner also said, "Utilities have become our preferred industry." Perhaps it's time to enjoy the honeymoon period brought by utility stocks