Key insights
- Energy continues to outperform: XLE gained 24.3% over the past year, and XLU 17.4%, beating the S&P 500’s 14.9%, supported by tight supply, disciplined capital spending, and strong shareholder returns.
- AI is driving a new power cycle: Explosive growth in data center power demand reinforces the need for reliable baseload energy, boosting long term fundamentals for oil and gas.
- There are multiple ways to participate in this trend beyond chasing energy and utility stocks. Small cap stocks, dividend stocks, and low-volatility stocks all have more exposure to these sectors than their benchmarks.
- Bitcoin is an energy linked asset: Mining economics tie Bitcoin to global energy abundance and innovation.
Review your portfolio mix to build steadier long-term performance.
Over the past several years, one sector has quietly outpaced the broader U.S. equity market: energy.
While the S&P 500 has surged on the strength of mega cap technology, the energy sector has delivered even stronger performance. Over the past 12 months, energy stocks returned 24.3%, beating the S&P 500’s 14.9% gain (Source: Morningstar Direct).
For retail investors who may have overlooked the sector, it's worth understanding why energy has been so resilient — and why its relevance may be increasing.
Why energy is outperforming other investments
More than just oil prices
Energy’s strength is often attributed to geopolitical tensions, but that’s only part of the story. The real drivers are structural and long-term. Both traditional oil and gas-linked power producers and the infrastructure that delivers electricity across all fuel sources are benefiting from a reshaped energy landscape in the AI era.
Underinvestment in supply
For nearly a decade, global energy producers underinvested in new production. ESG pressures, low commodity prices, and regulatory bottlenecks contributed to a supply constrained environment.
When demand rebounded post pandemic, supply simply couldn’t keep up. Tight supply plus steady demand is a powerful formula for higher prices and stronger profitability, a dynamic the U.S. Energy Information Administration tracks in its Annual Energy Outlook.
Capital discipline and shareholder returns
Energy companies have transformed their business models. Instead of chasing production growth at any cost, they now prioritize efficiency and shareholder returns.
Energy and utility constituents consistently deliver above market dividends and aggressive buybacks, according to S&P Global Dividend Aristocrats research, making the sector attractive for income-oriented investors.
AI infrastructure is an energy story
This is the most underappreciated catalyst.
Artificial intelligence isn’t just a software revolution — it’s a power revolution. Training large AI models and running hyperscale data centers require massive amounts of electricity.
The International Energy Agency estimates that global datacenter electricity demand could double in 2026. Big Tech companies are already warning that power availability is becoming a constraint on AI expansion. Center electricity demand could center electricity demand could.
Impacts of AI infrastructure needs:
- Higher natural gas demand
- More grid investment with scale
- More need for reliable baseload power
- Greater emphasis on energy security
AI’s growth directly reinforces the importance of traditional energy sources — with utilities as the gatekeeper. Even as renewables expand, the world still relies heavily on oil and gas to keep the digital economy running.
Artificial intelligence isn’t just a software revolution — it’s a power revolution.
How to position energy investments going forward
CLA uses several strategies for investing in the continued strength in the energy sector.
Small cap stocks
Small cap indices – represented by the S&P 600 contain almost double the energy exposure than the large cap S&P 500, Because small caps tend to be more sensitive to commodity cycles, SPSM offers more torque if energy prices continue to rise. With small-cap valuations still historically discounted, this segment can be a leveraged way to participate in the energy cycle.
Dividend strategies
Dividend focused strategies tend to overweight energy producers and energy infrastructure because these industries generate substantial free cash flow.
In particular, US dividend growth strategies - which holds companies with 25+ years of consecutive dividend increases — typically carries a higher energy and utilities weighting than the S&P 500. For income-oriented investors, we like this strategy as it provides a disciplined, high-quality way to gain additional energy exposure.
Low volatility stocks also is a way to get energy exposure – without the risk. Specifically, it includes a meaningful allocation to power demand through a significant exposure to utilities (21.6%). Because these companies often exhibit stable cash flows and strong dividends, they naturally screen well in low volatility methodologies. volatility methodologies. volatility methodologies.
Bitcoin: An unconventional but increasingly relevant energy play
Bitcoin may seem unrelated to traditional energy investing, but the connection is deeper than many realize. Bitcoin mining converts electricity into digital scarcity. Miners seek the lowest cost power sources, which often include:
- Stranded natural gas
- Excess renewable energy
- Underutilized grid capacity
In this sense, Bitcoin acts as a buyer of last resort for energy, monetizing power that would otherwise be wasted. For investors, Bitcoin exposure can be viewed — at least partially — as a play on global energy abundance and innovation.
Our perspective at CLA
Energy has outperformed for reasons that go far beyond geopolitics. Structural underinvestment, disciplined capital allocation, and the explosive growth of AI infrastructure have all reinforced the sector’s importance.
Looking ahead, investors can still gain quality exposure to energy with allocations to small-cap equities, dividend-paying stocks and low-volatility stocks. Even Bitcoin is an indirect energy linked asset — with attractive valuations after its nearly 50% drawdown in the past four months.
For a sector often dismissed as “old economy,” energy continues to prove it is one of the most essential and compelling parts of the modern investment landscape.
How CLA can help with energy investments
At CLA, our wealth advisors take the time to understand what matters most to you and build portfolios with clarity and purpose. By thoughtfully combining equities, fixed income, and select alternatives, we aim to create balance, smooth the ride, and support your financial path through a wide range of market environments.
If you’re curious how your current investment mix aligns with where you want to go, we’re here to help you look at the full picture and make confident, informed decisions.