Key Highlights

● Utilities trailed only energy among Friday's best-performing sectors as technology shares fell sharply.

● NiSource rose after announcing a long-term energy agreement with Microsoft for an Indiana campus.

● Industrial production rose more than expected in September, with a strong utility output gain.

● The 10-year yield ended the week near 5.1, down from above 5.3 earlier in October.

Utilities among the leaders

Utilities were among the best-performing sectors on Friday, trailing only energy in sector fund data. The Utilities Select Sector SPDR fund climbed while the technology sector fund fell sharply. Consumer staples also gained. The shift came as the S&P 500 fell 84.62 points to 7,659.44 and the Nasdaq Composite dropped 572.99 points to 26,140.03, its worst week since June.

Utilities have long served as a defensive corner of the market. Their regulated businesses tend to produce steady earnings and dividends regardless of the economic cycle, which can make them attractive when investors grow nervous about higher-risk growth stocks.

The tech trigger

The nervousness on Friday was centered on artificial intelligence. Investors shifted from asking what AI can do to how it will be financed, according to market commentary. CoreWeave (NASDAQ:CRWV), which carries more than $50 billion of debt, plunged, and all 30 members of the PHLX Semiconductor Index fell. In a 45-stock software basket, 41 names fell, erasing roughly $130 billion in value. The VIX climbed to 19.99 after touching its highest intraday level since June 11.

The AI angle for utilities

Utilities are also tied to the AI story, but from a different direction. Data centers need enormous amounts of electricity, and power companies are signing long-term agreements to supply them. On Friday, NiSource (NYSE:NI) rose after announcing a long-term energy agreement with Microsoft (NASDAQ:MSFT) for a campus in northwest Indiana, according to market reports. NiSource said the deal should raise expected customer savings at its NIPSCO utility to about $1.75 billion.

That gives utilities exposure to AI-driven power demand through regulated businesses, a contrast with the debt-funded infrastructure names that sold off on Friday. One market commentator captured the broader split in the AI trade: "The AI group is now splitting between companies that can fund the buildout themselves and those that have to borrow."

Constellation Energy (NASDAQ:CEG), the nuclear power producer, drew a new bullish call on Friday. CIBC initiated coverage at Outperform with a $358 price target.

Economic data released Friday showed electricity production climbing sharply. Industrial production rose more than expected in September, and utility output posted a strong gain within that report. Overall industrial output reached its highest level since 2018, according to market reports.

The rate question

Utilities are often sensitive to interest rates, because their dividends compete with bond yields and because they borrow heavily to fund infrastructure. That makes the recent easing in Treasury yields helpful. The 10-year yield ended the week near 5.1, down from above 5.3 earlier in October, its highest since 2002. The 30-year yield sat around 5.42, below its Oct 7 peak, per market data.

The Federal Reserve raised rates a quarter point in September, its first hike in three years. Futures pricing suggests an October hike is less likely than it appeared after Wednesday's hot inflation report, though markets still price a hike by December. Fed Chair Kevin Warsh said on Friday: "I don't prejudge meetings."

NextEra and PG&E Open Utility Reports

The Fed's decision on Oct 28 and the path of long-term yields will help determine whether utilities keep their role as a haven. Utility earnings begin next week. NextEra Energy (NYSE:NEE) reports before the open on Wednesday, Oct 21, and PG&E (NYSE:PCG) reports on Thursday, Oct 22. Investors will look for updates on data-center power contracts and capital spending plans.