Key Takeaways
- Alternative energy stocks outperformed global equity markets last year on improving fundamentals, easing financing pressure and accelerating electricity demand.
- US electricity demand growth will at least quadruple in 2026, driven by AI data centers and the electrification of the economy.
- Alternative energy stocks have long been prone to boom-and-bust cycles, often driven by changes in interest rates and policy frameworks.
Alternative energy stocks staged a sharp comeback in 2025. From solar manufacturers to wind developers and clean-tech equipment makers, these stocks outpaced the broader stock market, sparking renewed enthusiasm for a sector many investors had written off.
Now, the key question is whether the recovery in the sector reflects a lasting shift in fundamentals, or will fade as quickly as it appeared.
The Morningstar Global Renewable Energy Index posted an annual gain of 10.0% in 2025 in euro terms, compared with 8.0% for the Morningstar Global TME Index and a 1.2% rise in the Morningstar Global Energy Index. That was a welcome turnaround for renewable energy stocks after four years of rising interest rates, supply-chain disruptions and policy uncertainty weighed on the sector.
A Repricing, But Also a Fundamental Shift
For some investors, the 2025 rally was not propelled by cheaper valuations. According to Roman Boner, senior portfolio manager at Robeco: “The rebound was both fundamental and a valuation reset, but the fundamental component was far more important than many expected.” After years of pessimism, expectations had fallen well below the sector’s actual earnings trajectory, he adds.
“Stabilizing interest rates were an important catalyst, easing financing pressure for capital‑intensive assets, but not the sole driver,” says Natalia Luna, senior thematic investment analyst at Columbia Threadneedle Investments. “Clean‑energy economics improved independently as mature clean energy technologies like renewables are more and more competitive versus fossil fuels alternatives.”
Sentiment around renewables stocks was very poor entering 2025, given the US administration’s views on sustainablility and the uncertainty surrounding the future of the Inflation Reduction Act enacted by the previous administration. “This gave us the opportunity to quadruple our solar holdings mid-2025, and at very attractive valuations,” says Xavier Chollet, manager of the Pictet - Clean Energy Transition Fund.
Chollet points to a structural shift in electricity demand as a key inflection point. “We estimate that US electricity demand growth will at least quadruple,” he says, “driven by AI data centers, the electrification of the economy and the reshoring of energy-intensive manufacturing such as semiconductors, batteries and electric vehicles.”
What to Expect for Renewables Stocks in 2026
Going into this year, valuations “have largely normalized, but they still don’t look stretched when you consider the sector’s strong multi‑decade growth profile,” says Robeco’s Boner. Relative to global equities, renewable energy stocks continue to trade below the market’s price/earnings-to-growth ratio, while business models are becoming less reliant on subsidies as underlying power demand accelerates.
At the same time, expectations around the energy transition have become more down to earth. Columbia Threadneedle’s Luna says markets now price in a “more gradual rather than a rapid shift” toward clean energy. Drivers such as energy security, grid constraints, electrification, climate resilience and AI-driven demand have moved to the forefront, supporting more realistic investment assumptions.
“Selective clean energy remains a differentiated structural opportunity, particularly in power, networks and efficiency,” she says. “Speculative emerging cleantech behaves far more cyclically.”
According to Robeco‘s Boner, the clean energy sector is increasingly underpinned by multi-decade capital expenditure tied to infrastructure needs. “Unlike macro-driven cycles, these are long-horizon, non-discretionary investments. The timing may fluctuate, but the direction is fixed.”
What Risks Do Renewable Energy Stocks Face?
However, the sector’s history counsels caution. Renewable energy stocks have long been prone to boom-and-bust cycles, often driven by changes in interest rates and policy frameworks. While borrowing costs are lower than their 2023–2024 peaks, they remain well above the ultra-low levels that fueled the sector’s earlier exuberance. Any resurgence of inflation or delay in rate cuts could quickly revive concerns about project economics and valuations.
Columbia Threadneedle’s Luna flags rising rates, grid underinvestment, weaker-than-expected AI-driven electricity demand, and major policy reversals as key risks. Boner, by contrast, sees infrastructure as the main bottleneck. “The energy transition, AI acceleration and electrification are moving faster than grids and regulatory frameworks can handle,” he says. Permitting delays, interconnection queues and slow transmission build-out could cap growth and increase volatility in project returns.
Pictet’s Chollet highlights a different danger: how investors access the theme. “The biggest risk is passive strategies, or overly aggressive active ones,” he says, pointing to loss-making business models in areas such as EV start-ups or green hydrogen. “These stocks can surge in one year and then lose 90% of their value.”
Flows Chase Performance, As Usual
Despite the sector’s volatility, performance has drawn investors back in. Even though the average fund in Morningstar’s Sector Equity Alternative Energy category posted an annualized three-year return of just 0.18%, returns jumped by about 30 percentage points in 2025 alone.
After nine quarters of net outflows, European investors have returned to pouring money into funds exposed to clean energy, showered with almost EUR 900 million in the last quarter of 2025.
“For the most part of 2025, investors missed out on a segment of the market that delivered some of the best returns. Investors are notoriously bad at timing the market. Flows rebounded in the final quarter, supported by greater policy clarity and renewed confidence in the positive outlook for clean energy,” says Hortense Bioy, head of sustainable investing research at Morningstar.
According to Bioy, clean energy has undoubtedly been caught up in the broader ESG backlash. “The reality is that this sector appeals to both ESG‑focused and non‑ESG investors. The energy transition narrative has evolved beyond the early‑2020s focus on decarbonization alone, shifting toward a more pragmatic emphasis on energy security, affordability, and industrial competitiveness,” she says.
Nevertheless, for Pictet’s Chollet, investors still underestimate the scale of the opportunity. “Stocks tied to the energy transition are not just cyclical growth trades,” he says. “There is a significant amount of secular growth still ahead.”
For renewable energy stocks, the easy part of the rebound may be over. What lies ahead in 2026 looks more like a test of discipline, fundamentals and selectivity.
