Utility stocks are on fire — here are Wall Street analysts' top picks

Utility stocks have turned into leaders recently, gaining more than 4% over the past five days to close out their best week of the year.

The S&P 500 Utilities ETF (XLU) is up more than 12% year to date in a reversal from last year when investors soured on the sector due to expensive projects and high interest rates.

The prospects of lower rates later this year and increased long-term demand for electricity from artificial intelligence has made the defensive part of the market look attractive, according to Wall Street analysts.

"The excitement surrounding AI has left many investors searching for the next big thing after meteoric rallies in names like Nvidia (NVDA) and Super Micro Computer (SMCI)," said Adam Turnquist, chief technical strategist for LPL Financial, in a recent note.

Energy consumption is expected to dramatically increase amid a boom in data center growth.

Additionally, a re-shoring of manufacturing, which requires more power for battery plants and chipmaking factories, and the proliferation of charging stations for electric vehicles are expected to drive a surge in energy demand.

"Power demand [in the US] for the first time in 15 years is actually growing," Neil Kalton, senior equity analyst at Wells Fargo, told Yahoo Finance.

Constellation Energy (CEG)

Constellation Energy is the largest owner of nuclear plants in the US. The Baltimore-based company has been a beneficiary of the government's push to transition to green energies and growing power demand from data centers.

Constellation shares are up more than 85% year to date as the company forecasts base earnings to grow by at least 10% annually through the decade.

"It is absolutely a growth stock and has attracted growth investors," said Well Fargo's Kalton.

The analyst highlights that Constellation produces power at roughly $25 per megawatt hour, while the government's Inflation Reduction Act allows for a selling price floor of $45 per megawatt hour, providing a minimum of $20 margin per megawatt hour.

"There is no limit to the profits they can make," said Kalton.

Wall Street is also bullish on the possibility of Big Tech building large-scale data centers with Constellation at their nuclear sites.

"The appeal of non-regulated nuclear, which is what Constellation owns, is that you could build a data center on the land at site and just directly hook into the data power plant there and take power," said Kalton.

During the company's earnings call CEO Joseph Dominguez highlighted the massive amount of energy hyperscalers will require.

"We're going to need data centers that are of size and dimension from a megawatt standpoint that is far beyond what currently exists out there in the market," said Dominguez.

"The data economy and Constellation's nuclear energy go together like peanut butter and jelly. And as such, we're in advanced conversations with multiple clients, large, well-known companies that you all know, about powering their needs," he added.

Constellation has been operating as a standalone energy provider since 2022 after a spin-off from utility giant Exelon (EXC). The company has been buying back shares and recently upped its dividend ahead of its earnings due on Thursday.

The stock has eight Buy, five Hold, and zero Sell analyst recommendations.

NextEra Energy (NEE)

The $147-billion-market-cap company is one of the largest electric power generators in the country. While NextEra owns a regulated utility in Florida, investors are more interested in its non-regulated part of the business, NextEra Energy Resources, which involves developing renewable energy in the US.

"The demand for renewables over the next five to 10 years is set to explode," said Kalton.

NextEra foresees annual earnings growth of 6% to 8% through 2026.

The company's CEO highlighted the boom in data center power needs and the onshoring of manufacturing capabilities to the US as reasons for the surge in demand.

"The re-domestication of industry in the US supported by public policy will drive the need for more electricity," CEO John Ketchum told analysts in April.

The stock is up about 20% year to date. The stock has 17 Buy, five Hold, and one Sell analyst recommendations.

Southern Company (SO)

Among the regulated utilities, Southern Company is one of the best performers inside the Utility sector year to date, with shares up more than 10%.

The company has benefited from data centers looking to build in the Georgia area, which represents higher electricity usage.

Last year Southern's subsidiary Georgia Power debuted the first nuclear reactor plant built from scratch in decades. Currently four nuclear units are in operation.

The Atlanta-based energy provider recently posted first quarter earnings per share 14% higher than the same period last year. Sales to data centers were up over 12% for the quarter compared to the same period in 2024.

"This is what making history looks like. These are the first new nuclear units built from the ground up here in the United States in over 30 years and we are proud to be the company that saw it through," Southern's CEO Chris Womack said during the company's latest earnings call.

Southern shares are up 9% year to date. The stock has 11 Buy, seven Hold, and three Sell analyst recommendations.

Ines Ferre is a senior business reporter for Yahoo Finance. Follow her on Twitter at @ines_ferre.