The artificial intelligence revolution, which promises to increase long-run productivity in the United States as well as the potential economic growth rate, is built on the foundation of the old economy, the so-called Rust Belt.
The media and financial markets are obsessed with the latest AI models, accelerated computing semiconductors, and companies valued at trillions of dollars. But few talk about the machinery companies, utilities, natural gas pipelines, rail lines, and industrial real estate investment trusts, REITs. These big, boring companies are the backbone of America.
The numbers are mind-boggling. A single new data center can use as much electricity as a small town. The hyper scalers: Alphabet-Google, Amazon, Meta, and Microsoft are signing long-term power contracts that look more like the energy footprint of a sovereign state than a business model. Data center electricity loads in the U.S. are increasing so fast that several states are already warning of shortages within a few years. Meanwhile, the AI giants are discovering that it is much easier to design a data center than to find a utility that can power it. The bottleneck to the AI revolution is not talent or capital. It is the power grid.
Suddenly, formerly boring, slow-growth companies such as electricity utilities have pricing power. These companies are crucial for national competitiveness and national security. America’s utilities are upgrading the grid and dealing with the physics of moving electrons rapidly and efficiently across vast distances. Pipeline operators are quietly winning too. Natural gas-fired plants are the only thing keeping large swathes of the AI ecosystem online. Rail lines, truck fleets, and port operators, perennial snoozers, are also riding the AI boom because data centers need concrete, steel, heavy equipment, and endless replacement parts.
Industrial REITs, another part of the market that has lived in the shadows for years, are now in the headlines. The infrastructure necessary for AI needs land, zoning approval, cooling systems, water rights, and access to power. REITs control physical space in the right location. Investors are climbing on the infrastructure train. Over the past year, some of the strongest returns have come not from technology companies but from Rust Belt companies such as Caterpillar, which moves the earth for data centers and manufactures turbines powered by natural gas. The stock price of Caterpillar is up about 49% year to date.
Utilities that used to trade at modest multiples now trade like growth stocks. For example, Constellation Energy, a utility valued at $11 billion, trades at about 40 times estimated earnings for the current year. Its share price has appreciated by 600% over the past five years. Vistra Corp, a Texas-based utility, trades at around 60 times earnings and has appreciated by 800% over the past 5 years. The AI boom requires a vast base of electric power. The stock market is re-pricing this reality.
There is a national security angle to the industrial companies and electric utilities that power the AI revolution. Countries with inexpensive, reliable energy and fast permitting will host the next wave of AI investment. The countries of the Middle East are fast becoming AI investment centers.
The U.S. has the advantages of scale, geography, and abundant natural resources, but it also faces a permitting backlog that slows transmission projects for years. It can take 18 years to approve a new electricity transmission system. Boring can be beautiful, but political dysfunction is not.
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Innovation rides on infrastructure, and infrastructure is built by companies that rarely make headlines. The next decade of American growth will depend on how quickly these long-ignored sectors can scale up to meet demand and whether the political will exists to let this happen.
The foundations of the AI revolution are dependent on the backbone of American infrastructure, power generation, transmission, machinery, and the U.S. transportation system. These companies are the Atlas of the AI revolution.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He publishes a daily Substack on financial markets, politics, and society. He can be followed on X and reached at [email protected].
