Are energy stocks the next superstars enabling AI? 

In the rapidly evolving landscape of artificial intelligence (AI), a new contender is emerging from an unfavored sector: energy.

In our previous report, we introduced a high-level framework that categorizes companies into two distinct groups: enablers and beneficiaries. Enablers are those who deliver essential technologies that underpin AI development. Think of specialized chip manufacturers such as Nvidia and Taiwan Semiconductor Manufacturing Co., and cloud service providers such as Microsoft and Amazon.

Beneficiaries are those who expect to improve productivity and operational efficiency through the use of AI such as financial services, drug manufacturers, marketing companies, and the rest of us.

As tech giants continue to dominate headlines, investors are beginning to look beyond the usual suspects for the next big opportunity in AI enablement.

Magnificent returns

The AI investment narrative has been largely dominated by the “Magnificent 7” stocks, with Nvidia leading the charge. These companies have seen significant gains, with NVDA boasting a 166% year-to-date return as of October 2024, far outpacing the S&P 500’s 22% and even the Magnificent 7’s collective 42% return.

However, whispers of Nvidia being a crowded trade and concerns over slowing earnings-per-share growth are prompting investors to seek new avenues for AI-themed investments.

While companies continue to ramp up spending on AI technologies—with quarterly capital expenditures for big tech firms like Microsoft, Meta, Amazon, and Alphabet reaching billions of dollars—questions about sustainable profitability loom large. This uncertainty has reignited interest in the fundamental infrastructure supporting AI: power.

The energy sector, a crucial enabler of AI, has now come at the crosshairs of prominent global asset managers. The investment thesis makes sense—reliable power infrastructure is critical to the operation of data centers that support AI technologies.

Growing demand for power

Energy demand is projected to rise, with the US expected to be the fastest-growing market for data centers, mainly driven by AI, computing needs, and increased connectivity through digitalization and cloud adoption.

According to McKinsey & Company, power consumption by data centers in the US is expected to more than quadruple from 147 terawatt-hours in 2023 to 606 terawatt-hours by 2030. To put that in perspective, according to the Carbon Collective, a service that helps people invest in climate-related companies and technologies, the energy consumption of all humans is said to be at approximately 17.7 terawatts today.

This substantial growth underscores the critical role of energy in powering the future of AI.

While the transformative potential of AI across various industries remains in its early stages, the market continues to gravitate towards enablers—companies providing the foundational technologies necessary for AI development and deployment. Beneficiaries, such as firms in healthcare and financial services, have yet to assume a leading role as AI’s transformative potential is still in its infancy.

Keeping an eye on the pivot

As it stands, there is still the surging demand for foundational technologies. Whether energy stocks will spearhead the next phase of growth or other contenders will emerge is yet to be seen, but the pivotal role of energy in powering AI infrastructure cannot be overlooked.

For now, investors seeking to capitalize on the robust performance of US markets—where technology continues to drive growth—may consider the Metro$ US Equity Feeder Fund (USD). For those with a higher risk tolerance and a desire for more concentrated exposure to the tech sector, Metrobank Trust offers access to two global funds: Invesco QQQ ETF, which mirrors the performance of the Nasdaq-100, and the Franklin Technology Fund, a mutual fund allocating at least two-thirds of its portfolio to companies poised to benefit from technological innovation and advancement.

All three funds have delivered strong results, each posting over 20% returns year-to-date.

(If you are a Metrobank client, please get in touch with your relationship manager, account manager, or investment specialist for more information. Not a client yet? Please sign up here so you can begin your wealth journey with us.)

ARIZ MARCELINO is an Equity Research Analyst in the Investment Services Division of Metrobank Trust Banking Group. In the local space, he covers the banking, consumer, and property sectors. His role extends to tracking global investment themes, contributing to asset allocation strategies. Previously, he was with the Markets Research Department, where he focused on macroeconomic research. Ariz holds a Bachelor’s degree in Banking & Finance from New Era University and has passed the CFA Level I exam. He is also a certified Financial Modelling and Valuation Analyst (FMVA) and holds several local industry certifications. Outside of work, he unwinds by watching popular sitcoms and anime series while enjoying a cup of hot matcha latte.

GERMAN DE LA PAZ III, CFA serves as an Equity Research Lead in the Investment Services Division of Metrobank Trust Banking Group. His coverage includes gaming, telcos, conglomerates, and utilities, as well as select global markets. Prior to joining the bank, he spent 9 years at Abacus Securities, starting as a Junior Investment Analyst and working his way up to Senior Investment Analyst. German holds a Bachelor’s degree in Humanities and a master’s degree in Industrial Economics from the University of Asia and the Pacific. Recently, he obtained his CFA charter and is currently pursuing additional industry certifications. In his free time, German enjoys playing sports, particularly basketball, and has a penchant for reading fiction books, watching suspenseful movies, and listening to music.

GINNY PECAÑA is the Head of Investment Services Division at Metrobank’s Trust Banking Group, overseeing markets and equities research, investment analysis, fund selection, portfolio analytics, and trade execution. Ginny has garnered multiple awards for fund management with her decades of banking experience. She holds a Bachelor’s degree in Business Management from the Ateneo de Manila University as well as various finance certifications. On weekends, Ginny plays Mom to two teenage boys and a 10-month-old corgi named Hobie.