Forget the Magnificent Seven. These AI plays are red hot

By CNN Newsource

Published May 16, 2024 5:26 AM

Analysis by Krystal Hur, CNN

New York (CNN) — A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber? You can sign up right here. You can listen to an audio version of the newsletter by clicking the same link.

Wall Street’s artificial intelligence enthusiasts are expanding their horizons.

The S&P 500’s utility sector has gained 14% this year, making it the third-best-performing category behind information technology and communication services. The sector is also outpacing the benchmark index’s 11% climb. Shares of Vistra have surged 152% this year, Constellation Energy shares have popped 91% and NRG Energy shares have gained 63%.

That’s a reversal from the sector’s dour returns last year. Utility stocks tumbled more than 10% in 2023, underperforming the S&P 500’s 24% gain, as investors betting on the artificial intelligence boom crowded into the Magnificent Seven big tech stocks. Wall Street also turned away from dividend-paying stocks, many of which are utilities, as high interest rates made bond yields the most attractive they have looked in years.

This year, the playbook has changed. Big tech’s market leadership has cracked. At the same time, investors are looking for cheaper alternatives to the Magnificent Seven, whose valuations reached lofty levels after last year’s tech-driven monster stock rally.

Enter utilities. These stocks are typically viewed as defensive plays, since people tend to prioritize paying for necessities like electricity over discretionary purchases when the economy is in rough shape. But investors are wagering this year that utilities companies will be key in building and running the infrastructure needed to service AI.

The utilities sector currently trades at roughly 17 times its expected earnings over the next 12 months, below the S&P 500’s multiple of about 21 and information technology’s approximately 28 multiple.

“Investors are now playing offense with utilities,” wrote Bespoke Investment Group researchers in a Monday note. “It takes a lot of power to run AI, and coupled with demand for (electric vehicles) and modern day heating and cooling needs, our current grid seems woefully inadequate.”

A Google search requires 0.3 watt-hours of electricity on average, while a ChatGPT request typically consumes about 2.9 watt-hours, according to the International Energy Agency. Factoring in that there are about 9 billion searches a day, nearly 10 terawatt-hours of additional electricity a year would be required if search engines fully implement AI. The agency predicts AI-related electricity demand will increase at least tenfold by 2026.

Plus, utility stocks’ defensive qualities have been attractive to investors who fear that the Federal Reserve will keep rates on hold after a spate of warm inflation data. While the April Consumer Price Index showed that prices cooled last month, investors expect the Fed will begin cutting rates in September at the earliest.

To be sure, not everyone is jumping into utility stocks. Adam Turnquist, chief technical strategist at LPL Financial, said that the company remains neutral on the sector despite recognizing it could have more upside.

“The growth trajectory of a utility company is not comparable to these poster children of AI” such as Nvidia and Super Micro Computer, wrote Turnquist in a May 9 note.

US inflation slowed in April, providing a glimmer of hope for weary Americans

After a hot start to 2024, inflation cooled back down in April, providing a bit of hope for Americans worn down by elevated prices, reports my colleague Alicia Wallace.

Consumer prices were up 3.4% for the 12 months ended in April, easing from 3.5% the month before, according to the latest Consumer Price Index report released Wednesday by the Bureau of Labor Statistics.

On a monthly basis, prices rose 0.3%, a slower pace of growth than the 0.4% seen in the two months prior.

Economists were expecting a 0.4% monthly increase and an annual gain of 3.4%, according to FactSet consensus estimates.

Rising gasoline and shelter costs accounted for more than 70% of the monthly increase in overall inflation, according to the report.

While elevated housing costs and high prices at the pump continue to weigh on Americans, Wednesday’s report did provide some welcome news on another staple spending area: Grocery prices fell for the first time in a year, dropping 0.2% from March.

A closely watched underlying measurement of inflation showed even more progress. Core CPI, which strips out the more volatile categories of energy and food, slowed from 3.8% to 3.6%, its lowest rate since April 2021.

From the month before, core CPI ticked up by 0.3%, its slowest pace since the end of last year.

Taylor Swift’s ‘Eras Tour’ could be worth almost $1 billion to British economy

Taylor Swift’s smash-hit “Eras Tour” is set to boost spending in the United Kingdom by nearly $1 billion, according to estimates by Barclays.

The British bank said in a report Wednesday that it expects nearly 1.2 million Swifties to attend the superstar’s shows in the UK this summer, with the typical fan expected to spend £642 ($810) on travel, accommodation and other expenses — injecting a total of £755 million ($953 million) into the economy.

It is just the latest example of “Swiftonomics” — the musician’s ability to influence the economies of the cities and countries that she visits on her mammoth global tour, which kicked off in March last year in the United States, reports my colleague Anna Cooban.

Fans are likely to fork out £121 ($153) for accommodation, £111 ($140) for travel and £59 ($74) in restaurants around the venues, according to Barclays, which based its estimates on customer transaction data and proprietary consumer research.

Swift will perform 15 shows across four UK cities in England, Wales and Scotland in June and August. The concerts sold out within minutes of tickets going on sale, with fans spending £206 ($260) on average on a single ticket, Barclays said.

Including the ticket price, UK concertgoers will spend, on average, £848 ($1,068) each, which is more than 12 times the average cost of a night out in the UK, according to Barclays’ research.