2024 U.S. Equity Outlook
Third Quarter
Key Takeaways
Regulations aren’t inherently bad for business, but they must foster and support innovation rather than stifle it.
Utilities benefit from the growth of artificial intelligence and likely need increased transmission capacity to meet the rising demand for electricity to power the data centers supporting AI.
Growth Stocks
Navigating Political and Regulatory Risks in 2024
As we manage our investments, we’re mindful of the economic, market and political environments that impact the operations of our portfolio companies. For example, we can model how tariffs — via cost changes or demand changes — would affect our estimate of a company’s fair value. In this way, the business risk from tariffs or trade restrictions is quantifiable.
It’s also important to point out that there’s a reason we have a risk analyst on our team. We want to ensure that we’re actively and systematically monitoring our risk exposures. Our goal is that the lion’s share of the risk we take comes from individual security selection, not other factors. The key takeaway is that we believe the companies we own have the potential to outperform their competitors because they’re strong companies, not because of political factors.
Said differently, our North Star is owning good businesses. We believe such companies — those with strong competitive positions and strong balance sheets — possess fundamental business strengths that make them well-positioned to ride out many risks.
AI Regulation and Its Impact on U.S. Companies
There’s often a presumption that regulations are bad for business. But that’s not necessarily true. Our economy and businesses need clear, well-thought-out rules and regulations to function properly. Ultimately, we want to see a legal and regulatory framework that fosters and supports innovation rather than stifles it.
Just consider the legal issues around the potential regulation of artificial intelligence (AI). When it comes to developing and deploying this technology, we need clear answers to several key questions. These include:
Establishing ownership rights over the intellectual property used to train generative AI models.
Developing methods to identify, discourage and deal with disinformation and deep fakes.
Ensuring that unintentional biases and discrimination aren’t perpetuated.
And none of this even addresses the high environmental costs and consequences associated with mass AI adoption.
AI regulation also has global implications. Because AI touches on national security, U.S. policymakers will worry about stifling domestic companies and putting them at a disadvantage compared to AI research in other countries.
This is particularly relevant now because the Biden administration has increased tariffs on $18 billion of imports from China in strategic sectors, including semiconductors, electric cars, steel and ship-to-shore cranes.1
At a time of rising global geopolitical tensions, we expect the companies in our portfolios to be proactive in thinking about these issues and consulting with policymakers to craft regulatory solutions that clear both business and national security hurdles.
¹ The White House, “Fact Sheet: President Biden Takes Action to Protect American Workers and Businesses from China’s Unfair Trade Practices,” May 14, 2024.
Value Stocks
AI-Driven Growth in the Utilities Sector
As long as the power stays on, most people have little occasion to think about their electric utility company, except when the bill arrives each month.
Investors sometimes have a similar view on utilities. Among various investment choices, utilities can be a relatively snoozy sector: An often-steady performer well-liked by value investors for its typically predictable nature. Not much tends to change for electric utilities. Their customer base, whose needs are predictable, remains largely the same year over year. Regulated utilities can’t quickly or widely adjust their pricing structures.
Higher interest rate environments, like the current one, pose particular challenges to electric utilities. Utilities tend to carry more debt than most companies, and rising yields may lead investors to invest in bonds rather than utility stocks.
Indeed, utilities in the S&P 500® Index fell 10% last year, while the overall benchmark rose 24%.2
The trend for utilities has shifted in 2024. The rapid spread of electricity-hungry data centers supporting AI is driving new demand for electricity and boosting utility companies. In April, the utilities sector was the only S&P 500 sector to post gains. Over the last three months, utilities have advanced more than all S&P 500 sectors except energy.3
Electricity use in the U.S. has been mostly flat since 2010, thanks partly to the improving efficiency of new electrical devices like LED lights, refrigerators and air conditioning and heating units.4 For the first time in decades, AI may drive significant new demand for electricity.
According to Bank of America Research and the U.S. Energy Information Administration, AI and other electrification sources have been estimated to drive U.S. electrical load growth at a 2.8% compounded annual growth rate from 2023 to 2030. This compares to an annual growth rate of only 0.4% from 2013 to 2023.
AI is powered by data centers, which are notorious electricity hogs. Owing to its computing power, the energy consumption behind a single ChatGPT query is roughly equal to 10 Google searches.5 According to International Energy Agency projections, data centers worldwide will consume 1,000 terawatt hours of electricity in 2026, up from 460 terawatt hours in 2022.6
Other factors are also driving electricity demand. Electric vehicles will significantly increase the need for electricity, especially as demand for them picks up from their current doldrums. The reshoring of manufacturing and supply chains, such as semiconductor plants and electric vehicle plants, is also amplifying electricity needs.
But AI leads the surge.
We see this as a long-term trend that benefits utilities. However, the potential gains for regulated utilities may be limited, as they can only raise rates within the bounds set by state regulators. Moreover, they must consider the impact of higher rates on customers. However, the rise in electricity demand can prompt regulated utilities to increase their rate base — this is the asset base from which regulators will allow the utility to earn its rate of return faster, better cover fixed costs and invest more.
We believe independent power producers face fewer limitations and will likely experience greater benefits from AI's influence. Independent power producers operate with less regulation and generate electricity that they sell to utilities, electric grid managers or consumers.
Some independent power producers are already riding a market wave. Shares of Vistra Corp., for example, are up 179% year to date as of May 28.7 By contrast, a recent Wall Street darling and semiconductor manufacturer Nvidia is up 134% this year.8
Potential Challenges for the U.S. Electrical Grid
Despite the potential benefits for utilities, we think there are reasons to temper expectations.
One concern is the extent to which the U.S. electrical grid is prepared to handle the rapidly increasing workload of data centers and other large industrial users. Utilities warn that they may need more transmission capacity to keep up with these users' demands.9
Projections about future electricity demand are constrained by what we have yet to learn today, including whether and to what degree advancements in data center technology cause them to run more efficiently. Electricity will be a cost driver — maybe the cost driver — for data centers, giving operators an incentive to make these facilities consume less electricity. Answers to these questions are at least a few years away.
For now, we think utilities can be an unexpected beneficiary in the wider frenzy over AI.
² “AI Boom’s Secret Winners? The Companies Expected to Power It,” Bloomberg, Natalia Kniazhevich, April 27, 2024.
³ S&P Dow Jones Indices, U.S. Sector Dashboard, May 31, 2024.
⁴ U.S. Energy Information Administration, “Monthly Energy Review,” May 2024.
⁵ International Energy Agency,” Electricity 2024: Analysis and Forecast to 2026,” January 2024.
⁶ Ibid.
⁷ FactSet.
⁸ Zev Fima, “Take Profits or Let It Ride – Undecided Nvidia Investors Should Ask Themselves 3 Questions,” CNBC, May 28, 2024.
⁹ Evan Halper, “Amid Explosive Demand, America Is Running Out of Power,” Washington Post, March 7, 2024.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
Diversification does not assure a profit nor does it protect against loss of principal.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.