Wells Fargo suggests that the utilities sector, currently lagging the S&P 500’s AI-fueled rally, is poised for significant gains as regulatory uncertainties clear. The bank identifies several “out-of-favor” utility companies, including Exelon and FirstEnergy, as emerging AI winners that offer attractive dividend yields and stand to benefit from increased demand from data centers and improved policy clarity. Despite current headwinds, Wells Fargo is optimistic about a re-rating of these stocks, presenting a unique opportunity for diversification and income.
While the S&P 500 surges on the back of artificial intelligence innovation, the utilities sector has largely been left behind. However, a recent report from Wells Fargo highlights several "out-of-favor" utility companies that could soon become the next major beneficiaries of the booming AI trade, all while offering attractive dividend payouts.
A team of Wells Fargo analysts, led by Sharr Pourreza, noted in a Tuesday report that "Utes have not performed like AI stocks YTD, lagging the SPX by ~330 [basis points]," or 3.3 percentage points. Despite the S&P 500 climbing 9.8% in 2026, the utilities sector has only seen a 7.5% rise, excluding reinvested dividends. Yet, analysts recommend holding utilities for their diversification potential and anticipated "re-rating upside in time."
The sector's underperformance and low correlation to the AI rally stem from several factors. These include regulatory and policy risks, resistance to new data center construction, and investors' tendency to prioritize utilities' immediate opportunities over their long-term growth tied to AI advancements. Further complicating matters, utilities connected to the PJM Interconnection, a major regional grid spanning 13 states (including New Jersey, Maryland, and Pennsylvania), face uncertainty. Customers in these areas are grappling with escalating power costs, and the Federal Energy Regulatory Commission (FERC) is scheduled to hold a conference this Thursday to discuss PJM's future, potentially even considering a breakup, according to Bloomberg News citing senior White House officials.
Nevertheless, Wells Fargo remains confident in the utilities sector's prospects. "We see scope for all these overhangs to clear in time, some as soon as November, with utility stocks re-rating as a result," the bank stated. Wells Fargo has identified a select group of emerging AI winners, primarily "eastern wires" companies, which are expected to capitalize on transmission and generation opportunities once regulatory and policy clarity emerges from FERC, PJM, and Pennsylvania. These companies also provide above-average market income through dividends.
Spotlight on Key Utility Picks:
Exelon
Chicago-based Exelon was prominently featured in Wells Fargo's report. With shares up 7% in 2026 and a current dividend yield of 3.6%, the company shows promise. In May, Exelon reported first-quarter operating earnings of 91 cents per share, surpassing FactSet's consensus estimate of 88 cents. The utility also reaffirmed its full-year operating earnings guidance of $2.81 to $2.91 per share, aligning with analysts' consensus of $2.85.
Exelon CEO Calvin Butler emphasized the company's efforts during an early May earnings call: "We continue to work closely with federal officials, PJM and state leaders, to address elevated supply costs and emerging reliability challenges across the system." He added, "Let me reiterate, you cannot have a conversation about affordability without addressing the underlying shortage of generation." Butler also highlighted Exelon's focus on securing its data center pipeline with FERC-approved transmission security agreements, which have brought in approximately $1 billion in collateral, ensuring developers contribute their share to infrastructure costs. Analysts mostly rate Exelon as a "hold," with LSEG data indicating a consensus price target suggesting a 5% upside from current prices.
FirstEnergy
Ohio-based FirstEnergy also made Wells Fargo's list, touted for its potential to benefit from clearer regulations and AI-driven growth. In early June, FirstEnergy reaffirmed its 2026 core earnings forecast of $2.62 to $2.82 per share, consistent with FactSet's consensus of $2.73. The company also reported a notable 32% increase in contracted demand from data centers and expressed strong interest from hyperscalers and developers in expanding power generation in West Virginia.
During a June presentation, FirstEnergy stated, "We are uniquely positioned to take advantage of data center growth, both in our service territory and across the region." The stock has seen nearly a 10% increase year-to-date and offers a robust dividend yield of 3.8%. According to LSEG, over half of the analysts covering FirstEnergy, which operates 10 utilities across six states, rate it a "buy" or "strong buy," with consensus price targets suggesting about 7% upside.
Other Noteworthy Mentions:
- PPL: Up nearly 3% in 2026 with a current dividend yield of 3.2%.
- Public Service Enterprise Group: Down 1% this year, yielding 3.4%.
