Investors should take a selective approach toward utility stocks in 2025 as the incoming Trump administration could create a more challenging environment for the sector, according to KeyBanc. The utility sector has rallied nearly 25% this year as investors realized increased electricity demand from artificial intelligence is not a passing fad, analyst Sophie Karp told clients in a note this week. AI has translated into tangible electricity load and earnings growth revisions for the sector, Karp said. Utilities also benefited this year from stabilizing interest rates and inflation. But the sector could face headwinds from the inflationary policies favored by the incoming Trump administration, Karp wrote. If inflation stagnates at above-average levels and then accelerates, the Federal Reserve could respond with higher interest rates that would hit the sector, the analyst told clients. At the same time, electricity demand from AI and manufacturing returning to the U.S. could help offset these inflationary headwinds for the sector, according to Karp. “As a result of this more complex macro environment, we become more selective with our Overweight picks and narrow our focus to a few value names and most likely beneficiaries of the positive industry trends,” Karp told clients. KeyBanc maintains the equivalent of a buy rating on the regulated utilities Xcel Energy , WEC Energy Group , CMS Energy Corp. , FirstEnergy Corp. and Portland General Electric . The bank views Xcel, WEC and CMS as high-quality names that will execute on growth opportunities, while FirstEnergy is a value pick that will benefit from the resolution of regulatory proceedings in Ohio. KeyBanc views Constellation Energy as a stock that is uniquely positioned to benefit from the power demand trend from AI in the U.S. due its nuclear assets, which have become increasingly attractive to the tech companies.