Utilities|AI Power Play Down 13% While S&P Rose 2%?

The Quarter's Scoreboard

In the third quarter, the S&P 500 rose 2%. Utilities fell 13%. This is the sector Wall Street has billed as the power supply for artificial intelligence. So why did it finish the quarter that far behind the market? On paper, the case looked airtight. Washington reportedly plans to lend Vistra about $4.2 billion to push more power out of its nuclear plants, and the energy secretary is expected to announce it Monday.

The stated reason is electricity demand that is accelerating after decades of slow growth, led by AI data centers. UBS research goes further. It says AI spending is spilling into the wider economy, and that the spillover is especially visible in utilities. And the market didn't dump everything with 'energy' in the name.

The energy sector was the quarter's best performer, up 16% as Middle East conflict squeezed oil supplies. So the selling wasn't about power or fuel as a theme. Something else hit utilities, and it showed up in the bond market. Markets are closed this Saturday, but Thursday's session left a mark. The 10-year Treasury yield touched about 5.3%, its highest level since 2002, before easing into Friday.

What does a bond yield have to do with a company that sells electricity? The timing of the losses gives the first clue.

Where the Selling Came From

The damage wasn't spread evenly. In the first eight sessions after the Fed's rate hike, utilities fell more than 4%. Seeking Alpha calls that their weakest performance following a rate hike. That's an observed timing link. The articles don't measure how much of the full 13% came from rates and how much came from anything else. Here's why rates matter.

Higher long-term yields raise businesses' financing costs and put pressure on stock prices, according to the American Institute for Economic Research. And the AI story asks utilities to build: UBS lists electricity infrastructure and utilities among the industries fed by data-center spending. Connecting the two is our inference, not a measured fact.

The buildout that promises growth also has to be financed, and financing now costs more than it has in two decades. There's a twist. Fox Business lists four forces behind this year's climb in long-term yields: the Iran war, federal deficits, tighter Fed policy, and a flood of corporate debt issued to fund the AI buildout.

The AI boom is one of the forces pushing up the rate that held back the sector meant to profit from it. The article doesn't rank the four. AI borrowing is part of the story, not all of it. And the sector didn't move as one block. Within that 13% drop, Constellation Energy gained while PG&E led the declines. The report doesn't give the reasons for either move.

What it does show is narrower: being a power company wasn't enough. The AI power trade didn't disappear, but it shrank to individual names.

What Comes Next

The bond market is also competing for the same savers. Treasurys with maturities of five years and longer have passed 5% in recent weeks, and planners report growing interest from investors seeking fixed income in retirement. That's the bar a rate-sensitive stock now has to clear. So the next move for utilities may depend less on data-center headlines than on yields.

Citi points to one rate variable on the calendar: divided Congresses have historically supported bonds, because gridlock lowers expectations of big fiscal stimulus. Citi also warns that this year's large deficit and 2027 debt-ceiling talks may weaken that pattern. Even if yields fall, that would only test the rate side of the story. Nothing in this week's coverage shows that lower yields would bring utilities back.

So why did utilities fall while AI's appetite for power grew? The demand is real, but this quarter the sector traded on the cost of money. AI's own borrowing is one of the forces raising that cost. For utility stocks, the AI power trade now runs through the bond market.

Informational only, not investment advice. Figures and quotes come from the linked reports.