What’s next for nuclear stocks after regulatory pushback?

Nuclear energy stocks have become a favorite of Wall Street this year as the artificial intelligence boom spreads and Big Tech searches for ways to meet its growing power demand.

They helped power the S&P 500’s Utilities index (XLU) to all-time highs — the index is on track to outperform the S&P 500’s equal-weighted counterpart (^SPXEW) in 7 of the past 10 months, according to data compiled by Bloomberg. And Vistra (VST), a nuclear power company, recently surpassed Nvidia (NVDA) as the biggest gainer in the S&P 500 (^GSPC) year to date.

Big Tech firms, including Amazon (AMZN), Microsoft (MSFT), and Google (GOOG), drove the gains, announcing hundreds of millions of dollars in investments in nuclear power names over the course of several weeks.

It’s a story the market ran with. Then came a regulatory wrist slap that briefly stopped the nuclear energy rally in its tracks.

In a 2-to-1 ruling on Nov. 1, the Federal Energy Regulatory Commission (FERC) rejected a request from Talen Energy (TLN) to increase the power it could provide Amazon from its Susquehanna power plant, citing concerns about grid reliability and energy affordability.

Several nuclear energy stocks, including Talen, Oklo (OKLO), Centrus Energy (LEU), Vistra (VST), and NuScale Power (SMR), tumbled the following Monday.

Amazon is expected to petition the decision, according to CFRA analyst Daniel Rich. But for investors, “it certainly is a setback,” Rich said.

Rich explained that co-location agreements have become a major focus for the tech industry, as they allow hyperscalers to buy power directly from an existing energy source for their data centers. This enables them to build more data centers at speed and at lower costs.

But these agreements may be a sticking point for regulators, which is why Big Tech has pursued other strategies, such as creating new sources of nuclear energy through small modular reactors (SMRs).

Though there are currently no SMRs in the United States, companies like Amazon see them as a way to affordably add to the power grid while also meeting the increased energy demands AI requires.

“The order may not represent a long-term risk,” ClearView Energy Partners managing director Timothy Fox told Yahoo Finance. “It’s more that FERC may have punted or didn’t want to set a precedent about co-location until it had firm policy.”

Clay Sell, the CEO of nuclear reactor designer X-energy, told Yahoo Finance that “a significant portion of the increased electricity demand in the US for the next 25 years is going to come from AI.”

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“It could be as high as 10%, 20%,” Sell added.

Apollo chief economist Torsten Sløk also recently contextualized the amount of power the AI boom is going to require. His data shows that you’d have to add three New York Cities‘ worth of power to the grid by 2030 to meet the demand that is going to come from artificial intelligence. (Disclosure: Yahoo Finance is owned by Apollo Global Management.)

Tech companies see nuclear as a way to meet that demand.

That may be one reason why Amazon is not done with co-location, telling Yahoo Finance via email that “we remain committed to continue innovating and advancing carbon-free energy solutions with companies like Talen Energy to power data center operations in the United States and the many technologies supporting our customers and our daily lives.”

Constellation Energy CEO Joseph Dominguez also rebuffed regulators on his company’s earnings call, which came one day after the ruling, saying, “Co-location in competitive markets remains one of the best ways for the US to quickly build the large data centers that are necessary to lead on AI.”

Despite beating on earnings and revenue, Constellation stock (CEG) fell after the company reported third quarter results due to fallout from the Talen news.

But CFRA’s Rich said Constellation is a stock to watch in nuclear.

“I think Constellation is the most buyable dip,” he said. “Constellation … is by far and away the largest nuclear operator, more than three times more megawatt capacity than the next competitor. And we think that in our view, nuclear is really one of the best ways to service this type of demand from companies like Amazon, Microsoft, [and Magnificent Seven] names that have large needs for power.”

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