AI dollars are flowing to industrials and utilities

Industrials and utilities are receiving the initial capital tied to artificial intelligence projects to build data centers, expand power grids and supply related equipment. Technology companies are expected to realize earnings from AI at a later stage.

Matt Bartolini, global head of research strategists at State Street Investment Management, noted money is flowing to firms that construct the physical backbone for AI. Data-center builders, electrical equipment manufacturers and utilities adding capacity are recording earlier revenue because contracts and construction work generate cash now.

Bartolini put it this way: “They’re getting that first dollar of spending, and that’s why we see some of the earnings growth right there in an immediate perspective.”

Demand from technology firms has translated into orders for industrial machinery, electrical components and increased utility services to power new computing centers.

State Street’s Industrial Select Sector SPDR ETF (XLI) held about $33.1 billion in assets and had a 0.08% expense ratio. The Utilities Select Sector SPDR ETF (XLU) holds companies expanding the electrical grid. Bartolini flagged the broader energy complex and materials sectors as areas to watch given ongoing inflation and shifts in global energy flows.

Analysts point to two near-term headwinds for technology. Valuations in information technology and communication services have risen, and higher interest rates reduce the present value of cash flows expected years ahead. Tech stocks often behave like long-duration assets, so increases in discount rates can weigh on their prices more than on companies with nearer-term revenue.

Hamish Preston, head of U.S. equities at S&P Dow Jones Indices, pointed out U.S. companies account for roughly three-quarters of global market capitalization in information technology and communication services. That concentration gives U.S. sector decisions a large influence on global capital allocation in those industries.

Inflation remaining above the Federal Reserve’s preferred level has led some investors to consider equities in energy and materials tied to natural resources.

At present, industrial and utility firms report revenue tied to AI-related contracts and construction, while technology firms continue to plan product development and future monetization of AI.