Utility Stocks Are Rebounding. Here Are 3 That Could Continue to Soar In 2026.

Rising electricity demand from AI data centers is underpinning a bullish outlook for utilities, with the State Street Utilities Select Sector ETF up ~10% YTD and individual names outperforming (Constellation +~50%, NextEra +~11%, Dominion +~6%). Constellation's transformative $26.6bn Calpine acquisition (expected close early 2026) and long-term power contracts with Microsoft and Meta support >10% annual EPS growth through 2028; Dominion plans ~$50bn capex through 2029 (targeting 5–7% EPS growth) to serve Virginia data-center load and offshore wind; NextEra targets 6–8% EPS growth through 2027 with ~10% annual dividend growth and a 25-year nuclear power agreement with Google. These company-level catalysts and heavy capex/backlogs position the trio to capture accelerating power demand and drive sector returns in 2026 and beyond.

Analysis

Market structure: Winners are regulated and contracted-capacity owners (CEG, D, NEE) and hyperscale buyers (MSFT, META, GOOGL) that lock long-term PPAs; losers include uncontracted merchant generators and small renewables exposed to power-price volatility. The shift increases pricing power for utilities with regulated rate bases and long-term PPAs, compresses merchant spark spreads and raises bid levels for capacity/uranium; expect tighter electricity supply vs demand into 2027–2030 as data-center load ramps, supporting forward power and gas prices in regional hubs.

Risk assessment: Tail risks include PUC pushback or rate-case disallowances, Calpine deal failure (CEG) or material capex overruns that trigger credit downgrades; a macro slowdown or hyperscaler capex pause would sharply reduce incremental demand. Near term (days–months) monitor M&A closing and 2025–26 in-service updates (Clinton 2027, Three Mile Island 2028, Duane Arnold 2029); long term (years) watch transmission bottlenecks and counterparty concentration with top cloud providers.

Trade implications: Favor selective long exposure to CEG ahead of the Calpine close (early 2026) and to D for Virginia data-center growth, financed by trimming pure-play merchant renewables and high-beta utility developers. Use asymmetric option structures (buy Jan‑2027 LEAPS calls on CEG sized 0.5–1% NAV financed by selling short-dated calls) and consider pair trades (long CEG / short NEE) to capture idiosyncratic M&A upside vs priced-in growth.

Contrarian angles: Consensus understates equity dilution/capital raise risk from $50B+ capex plans (Dominion) and potential project delays that push revenue later, compressing near-term returns. The market may be overpaying for nuclear optionality (CEG +50% YTD) versus execution risk — historical parallels to infrastructure overbuild cycles suggest positioning size should be calibrated and hedged for 20–40% downside scenarios.

Key Decisions for Investors

• Establish a 2–3% long position in Constellation Energy (CEG) before the expected Calpine close (target close early 2026); objective: capture merger-driven EPS accretion and nuclear PPA premium, target +25–40% upside by end‑2026, place a hard stop at -12% to limit execution risk.
• Initiate a 2% long in Dominion Energy (D) for concentrated Virginia data-center exposure; time horizon 12–36 months to capture $50B capex rate‑base growth, take profits on >30% outperformance or if leverage headroom (net debt/EBITDA) moves >+1 turn vs current levels.
• Implement a pair trade: long CEG (1.0%) vs short NEE (0.6%) to express M&A and nuclear optionality over priced-in growth; rebalance at Calpine close and unwind if spread compresses to <3% absolute or after material regulatory headlines.
• Buy Jan‑2027 CEG LEAPS (10–15% OTM) sized to 0.5–1% NAV and finance by selling 1–3 month covered calls up to 30% of premium to lower cost basis—aim to capture multi-year upside while limiting capital at risk.
• Reduce exposure to uncontracted merchant generators and small-cap renewables by ~50% over the next 90 days; redeploy into regulated/utilities with secured PPAs or use proceeds to fund the CEG/D positions to improve portfolio resilience against capex and rate-case risk.