The thinking person's AI trade: There's a cheap, under-the-radar sector generating historically strong returns — and these 8 stocks are Goldman Sachs' top picks

Goldman Sachs

AI excitement is powering utilities higher

While utilities may bear little resemblance to flashy semiconductor stocks like Nvidia, the sector has emerged as a top way to invest in AI since the technology is immensely energy-intensive. Goldman Sachs analysts expect US power demand to surge by 2.4% from 2022 to 2030 after staying virtually flat last decade, which translates to a promising outlook for utilities.

"Downstream investment opportunities in utilities, renewable generation, and industrials whose investment and products will be needed to support this growth are underappreciated," Goldman Sachs researchers led by Carly Davenport wrote in a late-April note about the sector.

The firm reiterated that view even as the rally continued, with strategists led by Ryan Hammond writing in a late-May note that "generational power demand related to data centers and AI supports this improvement in long-term growth prospects."

Other market observers have made the same argument, including "Bond King" Bill Gross and Sebastien Page, an investment chief at T. Rowe Price, where he heads up the global multi-asset team.

"You have these giant data centers that are very computationally intensive, training those large language models and training AI applications," Page told Business Insider. "Building AI applications requires incredible computing power, which actually is a huge demand on energy. And that's where the utilities trade is happening right now. It's like an extension of the AI trade."

Although utilities and other AI-exposed stocks have been on a tear, Page doesn't think a bubble is forming, since it's supported by strong earnings. The investment chief added that AI is still in its early stages, and will eventually have an even broader impact on profits for all sorts of companies.

"Over time, the applications will bring productivity gains to other parts of the economy — not just Nvidia and Microsoft," Page said. He added: "This tidal wave of AI applications is actually going to help value companies — 'older-school' companies."

Utilities aren't just an AI play

Other than their understated connection to AI, utilities are attractive on a valuation basis and as a defensive hedge, according to Goldman Sachs.

At first blush, utilities don't seem cheap. The sector's forward price-to-earnings (P/E) ratio is just below its 10-year median, but sits above its long-term median. Its forward P/E is also above historical medians relative to the equal-weight S&P 500, Goldman found. Utilities' recent rally is to blame for that premium.

Goldman Sachs

"Most of the three-month return of utilities can be attributed to valuation expansion rather than improved near-term earnings expectations," Hammond wrote.

However, utilities are cheap compared to the high-single-digit earnings growth they're expected to produce in the next several years. The sector's PEG ratio — used to measure the trade-off between the price of a stock (P/E) and its expected earnings growth — is far below its historical average of 3x, Hammond noted.

Goldman Sachs

Besides being discounted relative to their future growth, utilities serve as a hedge against lower economic growth. US GDP growth looks steady at an inflation-adjusted rate of 3.5%, though investors expect that figure to fall to 2% in the coming quarters, according to Goldman Sachs.

These catalysts have pushed professional money managers toward utilities, as Goldman Sachs found that mutual funds and hedge funds' allocations to the group are the highest in 10 years.

Hedge funds were more bullish on utilities than any other sector in the first quarter, swinging from a modest underweight to a similarly sized overweight. But while mutual fund managers across styles added to utilities, the typical large-cap manager remains light on the group.

Goldman Sachs

Elevated interest rates are a reason to be wary of utilities, given that the sector functions as a bond proxy and lags when rates and yields rise. But top Federal Reserve officials have hinted that rates won't rise further, and forthcoming cuts could be yet another catalyst for utilities.

8 stocks to buy as AI gains steam

Goldman Sachs expects utilities to generate 8% earnings growth in 2026, which would be above its long-term average of 5% and the consensus estimate, leaving upside for revisions.

But some companies in the sector look much more promising than others. Although the average utilities name is up 6% in 2024, the current gap between leaders and laggards is unusually wide since investors are focused on firms set to enjoy higher power demand growth in the near term.

"This level of dispersion creates fertile stock-picking opportunities for micro-focused fund managers," Hammond wrote.

Of the 16 utilities stocks covered by Goldman Sachs analysts, only half have a buy rating from the firm. Below are those eight companies, along with the ticker, market capitalization, consensus earnings growth estimate for 2026, forward P/E ratio, and PEG ratio for each.