In a previous article, I discussed the increasing turbulence of the AI sector and how capital is increasingly chasing narratives rather than fundamentals. We drew parallels to the dot-com era and emphasized that while technological progress is real, it does not necessarily translate into sustainable shareholder returns.
Only time will tell whether today’s enthusiasm for artificial intelligence (AI) ultimately turns into a bubble or solidifies as a true long-term growth story. But there’s one way to profit from this frenzy without betting directly on AI stocks. It’s about investing in the drivers of AI’s explosive rise. And at the foundation of this entire ecosystem is one critical input: electricity.
The invisible backbone of AI: Power
The AI ecosystem is made up of many layers, including GPUs, software, data, cloud infrastructure, and people. But the final invisible layer is what holds everything together: a continuous and reliable power source. AI data centers are energy-intensive and require uninterrupted power to run dense computing clusters and advanced cooling systems. Their electricity needs are met by three broad sources: fossil fuels (60%), nuclear power (18.6%), and renewable energy (21.4%).
Fossil fuels such as natural gas (43%) and coal (16%) meet the majority of electricity needs in the United States, where the world’s largest AI data centers are located.
If you want to keep your data center running, you need an inexpensive and reliable energy source. Renewable energy is neither cheap nor reliable. Nuclear power is cheap and reliable, but adding capacity takes time. This leaves us with cheap and reliable fossil fuels. When these types of AI data centers emerge in the United States, electricity demand will go through the roof. And natural gas is what we need to keep our power plants online until nuclear capacity increases across the United States. This leaves us with a great opportunity that market participants have so far missed out on.
Energy sector weight near multi-decade lows
The first chart clearly shows that the energy sector’s weight in the S&P 500 index has fallen to about 2.6%. This is well below the 15% level in 2008 and well below the peak of the last supercommodity cycle of the 1980s and 1990s. In contrast, technology has expanded to the point where it dominates the index. This structural underestimation suggests that energy ownership remains low compared to historical norms, even as AI power demand is rapidly increasing globally.
Energy vs. Technology: Mean Reversion Settings?
A comparison of the S&P 500 Energy Index and the S&P 500 Information Technology Index shows that energy for technology is nearing historic lows in 2021. This ratio is extreme considering the massive rise in technology, especially AI-related names. Any rotation or even partial normalization can result in energy performance exceeding the technology in the next cycle.
Natural gas futures return to strength
Natural gas futures are nearing levels last seen during the December 2022 rally. The recent upward momentum signals a potential inflection point, often seen in the early stages of broad commodity bull markets. Natural gas futures appear to be pricing in a favorable demand outlook, coupled with stronger demand from the global LNG market and increased consumption from data centers.
Conclusion: How to navigate the decade of AI wisely
AI may or may not fulfill its most ambitious promises, but the infrastructure that powers it will be an inevitable and sustained boom. If the load on the world’s data centers doubles, the world will need more power.
However, energy remains one of the most undervalued segments of global stock indices. This creates a unique opportunity to invest in not just the story of AI, but the power behind it.
Even if enthusiasm for AI cools, global electricity demand will continue to increase through electrification, cloud expansion, and industrial transition. So whether the hype holds true or not, the energy sector offers a unique, low-risk way to benefit from the AI era.
Disclaimer: The views and investment tips expressed by investment professionals on Moneycontrol.com are their own and not the views of the website or its management. Moneycontrol.com advises users to check with certified professionals before making any investment decisions.
