$Vistra Energy (VST.US)$The best-performing stock in the s&p 500 index this year, while $Constellation Energy (CEG.US)$ranking third. However, utility stocks now look very expensive.

Although investors still have a soft spot for $NVIDIA (NVDA.US)$Vistra, this year's performance is even better. The utility stock rose by over 245% in 2024, becoming the best performer in the s&p 500 index. However, investors' bets on Vistra and other utility companies as beneficiaries of ai may need to be prepared for a cool down.

Yes, utility companies are often seen as boring bond alternatives, only attractive due to their high dividend yields. However, Vistra's stock price has soared, like Nvidia, also related to the artificial intelligence revolution. With the vigorous development of AI and strong demand for its chips, Nvidia's stock has soared nearly 150% this year.

Companies need to generate a large amount of electricity to support AI services. This is where Vistra, as a leader in nuclear energy, excels. Constellation Energy is another utility stock, with its stock rising over 135% this year, becoming the third best-performing stock in the S&P 500 Index.

In fact, the entire utility sector is soaring. The Utility Select Sector SPDR Exchange Traded Fund (ETF) has risen nearly 30% this year, outperforming the S&P 500 and Nasdaq Composite Index's 20% gain. (Constellation Energy and Vistra are the fourth and ninth largest holdings in the utility ETF, respectively.)

The surge in utility stocks may have come to an end. Dean Christians, a senior research analyst at SentimenTrader, stated in a report on Wednesday, "The sector has reached a critical juncture, with multiple indicators suggesting that the group has become excessively stretched during its rise."

The current trading price of the utility ETF is about 19 times next year's earnings forecast, slightly higher than its 5-year average forward PE ratio. Constellation Energy's PE ratio appears particularly high, exceeding 30 times the earnings forecast for 2025, the stock's highest level in years.

Christians stated, "It's hard to say what is driving the surge in utility stocks - changes in the Fed's policy, a slowdown in the job market, or expectations for energy demand driven by AI."

Nevertheless, investors may be wise to take profits off this hot sector. Christians points out that utilities "may be in for a downside reversal" and that "utilities do not look promising after such overbought and relative performance conditions, especially in the short and medium term."

Wall Street analysts also expect this frenzy to ease slightly. According to FactSet research, the median target price for individual stocks in the utility ETF is only 3.2% higher on average over the next 12 months compared to the end of September.

This is the sector with the smallest growth among the 11 industries in the s&p 500. It is only slightly lower than the 3.4% price increase forecasted for consumer stocks, which is another high-yield sector benefiting from the Fed rate cut. In contrast, the energy sector has the greatest potential for upside, with analysts expecting the sector to rise by more than 20%.

Of course, there are also some traditional utility stocks that pay generous dividends and have lower valuations. For example,$Duke Energy (DUK.US)$,$Dominion Resources (D.US)$And.$Consolidated Edison (ED.US)$companies are trading at moderate to high double-digit forward P/E ratios and yield over 3%. Considering this, James Ragan, Director of Wealth Management Research at D.A. Davidson, suggests that despite their significant increase, investors should continue to pay attention to opportunities in this sector.

Some individual investors seem to be unaware that utilities are now the stars in the market.

"The trend of utilities is quite crazy. They are usually boring and unpopular stocks," said eToro's American investment analyst Bret Kenwell.

Kenwell told Barron's that according to the company's latest survey of 1,000 retail investors, the level of holding utility stocks is still lower than other top sectors, especially financial services, technology, and energy.

This might be a good thing. Any investors hoping to ride the wave of utilities now are risking paying too high a price for many of the top stocks in that sector under the fever of artificial intelligence.

Editor/ping