Utilities: Data Center Demand Brings Growth and Risks for Investors

Utilities’ three-year stock rally has started to soften. Through late June, the Morningstar US Utilities Index is down 4% from its all-time peak in February, while the US market is up 8% during that time. Utilities had been outperforming the market for most of the last three years, but that lead has nearly evaporated.

This retreat in utility stocks comes as the first phase of the data center buildout begins. Many utilities are reporting faster demand growth this year than they have had in decades, mostly due to new and expanding data centers. We expect data center energy demand growth and infrastructure investment to accelerate at least through 2030. We forecast US data center electricity demand to grow from 5% of total electricity usage to 34% by 2035.

But this growth also creates risks for utilities that have tempered investors’ enthusiasm recently. Investors are concerned that customer affordability issues related to the data center buildout might constrain earnings growth.

With energy demand growing faster than the infrastructure to meet those demands, electricity prices are going up, leading policymakers in some areas to explore ways to limit bill increases and utilities’ profits. Utilities must find ways to ease cost pressures on customers while still delivering fair returns for investors.

Data centers and their huge energy needs are coming. Investors have been buying utilities stocks for several years, anticipating this growth. That growth is now showing up in earnings. This earnings growth should keep pushing utilities stocks higher, offsetting the sector’s historically low yields. But to sustain that growth, utilities must work with many stakeholders to ensure new infrastructure to serve data centers doesn’t lead to unusually large rate increases for all other customers.

Top Utilities Sector Picks

American Electric Power AEP

• Fair Value Estimate: $141.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low

AEP’s system peak demand could increase by 63 gigawatts by year-end 2030, with load additions in Texas, the mid-Atlantic, and the southwest. Data centers account for more than 80% of this incremental load. AEP plans to invest $78 billion in 2026-30 and has identified another $10 billion of possible incremental investment. We expect management to execute on half of this investment within our five-year forecast, given recent strong execution and diversity of AEP’s backlog. We forecast 9% average annual earnings growth through 2030, among the highest of its industry peers. This is in line with management’s expectation of 7%-9% guidance range in 2026-30, with management recently expecting growth to be at least 9% through this period.

Edison International EIX

• Fair Value Estimate: $81.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

Investors’ overwhelming concern remains Edison’s potential liabilities associated with the January 2025 Eaton Fire. The stock has rebounded from its 2025 lows but still hasn’t hit its pre-fire level. Management has acknowledged that shareholders could face material losses, but it could be late 2026 or beyond before there are any realistic loss estimates. Edison should have access to California’s $21 billion AB 1054 Wildfire Fund and the $18 billion expansion enacted in 2025 for future fire liabilities, resulting in minimal shareholder losses. Edison’s plan to invest $8 billion annually supports our 7% average annual earnings growth outlook.

DTE Energy DTE

• Fair Value Estimate: $157.00
• Morningstar Rating: ★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Low

DTE’s service territory around Detroit, Michigan, hasn’t had core energy demand growth for more than a decade. Data centers are set to change that and boost DTE’s earnings growth. DTE’s capital investment to serve new data centers, improve reliability, and add renewable energy supports our 7% core annual earnings growth through 2030. Growth could top 8% annually with more data center investments. After trading at a valuation discount to peers for many years, we think DTE’s stock deserves a premium given its transparent growth, upside, and regulatory support.