This AI dark horse sector keeps winning. Stick with the trade, analyst says

Wolfe Research says utilities have still outperformed the S&P 500 by about 400 bps year to date, even after a recent pullback, and argues that "winners keep winning." Entergy is up more than 27% YTD, with Wolfe citing a new Meta deal and raised long-term forecast; the stock is expected by analysts to gain about 4% over the next 12 months. NiSource and American Electric Power are also up more than 15% and 17%, respectively, with upside tied to data-center-driven capex and supportive regulators.

Analysis

This is less a broad utilities call than a dispersion trade inside a defensive sector. The market is rewarding names with credible multi-year load growth and rate-base expansion tied to data-center buildouts, while standard regulated utilities without that incremental demand engine are likely to lag as investors rotate back toward higher-beta growth. That creates a widening gap between “electrified growth” utilities and classic bond-proxy utilities, and the premium for the former can persist as long as capex is translating into visible earnings revisions rather than just story.

The second-order effect is that Meta-linked load growth is effectively becoming a proxy for industrial policy at the state-regulator level. If regulators continue to approve grid investment and recovery mechanisms, the winners can compound through both multiple expansion and upward EPS revisions; if they push back on cost recovery or delay rate cases, the market will likely punish these names quickly because the valuation already embeds a lot of future growth. Over the next 1-3 quarters, the key catalyst is whether capital expenditure plans continue to outperform consensus without triggering balance-sheet or regulatory concerns.

The contrarian read is that the crowd may be underestimating the duration of this leadership. Utilities have been treated as a generic defensive basket, but the winners now behave more like secular growers with visible demand tailwinds and a relatively scarce earnings-growth profile. The risk/reward is still constructive, but at current levels the better expression is to own the names with the cleanest forecast uplift and avoid the lower-growth laggards that will likely underperform if rates stay rangebound and tech-led risk appetite remains intact.

Key Decisions for Investors

• Stay long ETR into the next 3-6 months; best risk/reward remains to own the utility with the clearest multi-year earnings re-acceleration. Upside is driven by estimate revisions rather than multiple expansion alone; trim only if the stock outruns forward EPS by a wide margin.
• Add NI and AEP on pullbacks over the next 2-8 weeks as a relative-strength basket versus the broader utilities sector. These names should benefit from the same data-center capex theme; downside is mainly regulatory delay, while upside is continued upward earnings revisions and sector leadership continuation.
• Pair trade: long ETR/NI/AEP basket vs short a lower-growth utility ETF or a basket of laggard regulated utilities. This isolates the dispersion trade; expect the spread to work over 1-3 months if rates remain stable and AI/data-center demand stays intact.
• Avoid chasing the weaker utility cohort after the recent rally cool-off. The setup favors names with identifiable capex monetization; absent that, the sector re-rating may stall and those names can underperform even if the index holds up.
• For more aggressive exposure, use call spreads on ETR with a 3-6 month horizon to express continued leadership while capping downside if regulators or rates reverse sentiment. Best payoff if earnings guidance is reiterated and the market keeps paying for scarcity of growth in defensives.