Investment Insights
The Other Energy...
Sunil Garg, CMT, Chief Investment Officer
XLE has been the obvious energy trade. The next one may be power.
With its heavy weighting to the oil majors, XLE has effectively been a play on oil, outperforming each time Middle East tensions, and crude, have resurfaced.
But as we argued in Atoms to Intelligence (Drishtant Chakraberty et al), the AI ecosystem has another energy problem altogether - power. Reliable, scalable and increasingly scarce power. Think nuclear. Think baseload generation. Think grid. Think power infrastructure.
The thematic has been well understood. The price action has not cooperated.
Despite the AI power bottleneck, power-related stocks have had a torrid few months, dramatically underperforming both oil equities and the broader market. Vistra and Constellation Energy have been amongst the casualties.
That may now be changing.
The sharp October 6 rally matters not simply because these stocks went up. It matters because price action is finally beginning to catch up with the thematic - and it comes just as the broader market is showing the early breadth revival we discussed in Breakout, Meet Breadth.
We’ve liked the theme. We are beginning to like the tape.
Oil Won, Power Didn’t - XLE is up roughly 44% YTD, dramatically ahead of both the S&P 500 and the broader non-oil energy complex. Power-related equities, by contrast, have suffered significant drawdowns despite one of the clearest structural demand stories in the AI ecosystem. That divergence is beginning to narrow at the margin. October 6 may prove an important first step.
Power - The AI Chokepoint - AI may begin with compute, but compute begins with an electron. Reliable power, and the infrastructure required to deliver it, is becoming one of the critical chokepoints of the AI buildout. As highlighted in Atoms to Intelligence, accelerating a 200 MW data-center project by six months can bring forward billions of dollars of revenue. That makes access to firm power economically valuable far beyond the electricity itself. The theme isn't new. What is new is that the tape may finally be agreeing with it.
Power Catches a Bid - What changed on October 6? Google’s agreement with Constellation was the spark, but not the whole story. Within the space of a week, Amazon committed to a 20-year Constellation agreement, the DOE conditionally committed up to $4.2bn to Vistra’s nuclear fleet, and Google followed with an agreement supporting 890 MW of incremental nuclear capacity at Constellation.
Hyperscaler demand and government capital are suddenly pointing in the same direction: America needs more firm power, quickly.
The thematic was already there. What October 6 may have changed is the tape.
We’ve liked the thematic. Now, we also like the price action. The setup increasingly supports long exposure, with late-September lows providing a natural risk-management level.
Power Finally Catches a Bid -UTES Relative to the S&P 500
Oil Won the Year. Power May Be Next.
