Few sectors are as seemingly mismatched as technology and utilities. One is growth-oriented, focused on innovation, and until recently relatively averse to dividends; the other is slow-growing, stable, and has long been favored by income-seeking investors.

However, these two are now joining forces, and the driving force, as usual, is artificial intelligence.

Last Friday, Constellation Energy (CEG.O) saw a 25% increase in stock price, a fluctuation typically associated with the technology sector rather than utilities, as the company signed a 20-year power purchase agreement with Microsoft (MSFT.O). This deal involves the notorious Three Mile Island nuclear power plant, the site of a partial nuclear meltdown in 1979, with one reactor dormant since then and another reactor closed in 2019 for financial reasons. The Governor of Pennsylvania hopes to expedite its reconnection to the grid.

This is not the first time this tech giant has entered the energy sector. As recently mentioned by Barron's, Microsoft has been hiring nuclear energy experts and has also agreed to purchase nuclear energy from a fusion startup named Helion, supported by OpenAI's Sam Altman.

This year, Amazon (AMZN.O) reached an agreement with Talen Energy (TLN.O) to directly link its datacenters to an existing Pennsylvania nuclear power plant bypassing the grid. Similarly, Microsoft and Amazon, along with Alphabet (GOOGL.O) and utility company Duke Energy (DUK.N), are collaborating to explore ways to lower the long-term costs of clean energy like nuclear energy.

The sole reason for all these technology companies' involvement is that nuclear energy can power the most demanding artificial intelligence applications without conflicting with the requirement to reduce carbon footprints.

"The link with artificial intelligence is one of the reasons why the utilities sector performed best in the third quarter, and why the utilities select sector index ETF-SPDR (XLU) has outperformed the S&P 500 index and risen over 25% year-to-date," wrote Tom Essay from the market research firm Sevens Report. "Moreover, this trend appears to be sustainable."

Indeed. Goldman Sachs (GS.N) predicts that by 2030, the electricity consumption of artificial intelligence data centers will more than double, accounting for 8% of the total output in the USA. Coupled with the increasing popularity of electric vehicles, it is obvious that the demand for electricity will continue to grow.

Artificial intelligence is also a reason why analysts are rediscovering their favor for certain stocks. Duke Energy received an upgrade from CFRA analyst Daniel Ritchie on Tuesday. He upgraded the rating from 'sell' to 'hold' and raised the target price by $12 to $120, pointing out that the stock should receive a premium for its nuclear fleet recognition and the potential long-term growth opportunities from artificial intelligence, data centers, and significant capital expenditure budgets by Duke.

However, this is not the only reason for being bullish on these stocks, as Iat points out: 'The growth story of artificial intelligence only adds momentum to the optimistic outlook for utilities, which already includes 1) declining bond yields (making high-dividend stocks like utilities more attractive to yield investors) and 2) economic slowdown (increasing demand for stocks with lower economic sensitivity).'

There is also a pricing issue. The valuation of the S&P 500 index has risen due to this year's rebound, mainly driven by more expensive technology stocks. Therefore, for investors looking for cheaper ways to invest in artificial intelligence, the utilities sector is a good choice, an alternative 'shovels and picks' investment logic because without electricity, any artificial intelligence technology would not be operational.

Ultimately, 'With cash-rich large tech companies potentially entering the electricity market, this introduces a new source of demand for an industry with very high barriers to entry,' Iat concluded. 'This could be very positive for long-term prospects.' Despite XLU rising by about 25% in 2024, he believes that considering these catalytic factors, the exchange-traded fund still looks very attractive.