Inside S&P 500 AI boom, industrials are getting as rich as tech stocks

While the construction of artificial intelligence infrastructure and global geopolitical developments encourage big spending, the old guard sector of the economy is attracting investor interest to rival the action in technology. industrial sector S&P 500 It trades with a price-to-earnings ratio above 30, a level investors more commonly associate with high flyers, and a P/E ratio well above the long-term average of industrial companies, which is closer to 20.

“If you look [Industrial Select Sector SPDR] XLI “Valuations from State Street are really high relative to the S&P 500,” VettaFi research director Cinthia Murphy said on the latest “ETF Edge.”

“This is an industry as high as tech, so it’s an industry that’s really having its moment in the sun and gaining a lot of attention,” Murphy said.

The race to build AI data centers in hopes of gaining a lasting business advantage in a rapidly changing digital infrastructure has gripped the business world and the technology sector. AlphabetAs part of its earnings report on Wednesday, it forecast capital expenditures for this year to be between $195 billion and $205 billion. Previous guidance was for spending between $180 billion and $190 billion.

McKinsey & Company forecasts show that this investment will not stop in the near future; Reports show that global spending on data centers could reach nearly $8 trillion by 2030. The majority of this spending will be devoted to data center infrastructure and IT equipment.

Alphabet has warned that spending figures could rise even higher in 2027.

“Artificial intelligence is a technology play, but nothing happens without the infrastructure in place,” Murphy said. “There’s a whole backbone infrastructure that needs to be built, and that’s really pushed industrialists forward.”

“We’ve just started this build. We’re in the several hundred billion dollar space. Trillions of dollars of infrastructure still need to be built,” Nvidia CEO Jensen Huang said in March. blog post. “This is becoming the largest infrastructure build in human history.”

The majority of projects in the later phases of data center expansion across the country are expected to occur in rural areas. Expansion of rural power grids may be necessary to meet the staggering power demand associated with data centers. The peak generating capacity of rural electric grids in the United States remains relatively limited on average. There is now a push to develop facilities that regularly consume up to twenty times current power capacity, intensifying corporate demand and the need for industrial support. This demand is coming Despite increasing social hostility New data center construction is being driven due to local concerns about strained power grids and rising electricity costs.

Building this AI backbone across the U.S. requires new electrical substations, strengthening high-speed fiber internet capabilities, and developing new energy-saving battery technology. Large amounts of power generation and backup equipment, construction machinery, and electrification software emerged as requirements for scaling. As a result, manufacturing companies in the machinery and electrical equipment sectors increased, accounting for 20.89% and 14.16% of XLI holdings, respectively.

CaterpillarETF’s largest holding and GE VernovaThe third largest holding in the industrial index has increased by over 50% this year. Caterpillar is up almost 160% from two years ago. While GE Vernova continues to benefit from bookings related to its AI build, its renewable energy business has been hit by the downturn in the wind energy sector, leading to a decline in sales this week after earnings despite a $176 billion business backlog at the end of the second quarter. It’s not just the heavyweights who benefit from this. Emerson ElectricXLI, XLI’s 29th largest holding, is trading almost 20% higher than it was in July 2024, despite experiencing slight losses last year. hubbellIt has increased by 30% in the two-year period ending in July 2024, the 60th largest holding.

It’s not just the AI ​​boom that’s driving stock valuations at XLI, but dozens of other industrial ETFs have also been launched targeting multiple areas of the industry.

“There are over 60 industry ETFs that fall into this sector category, and in total they have seen net inflows of approximately $23 billion year-to-date,” Murphy wrote in an email to CNBC. “Not only have industrial sectors performed really well relative to the market, but investors are also looking at continued growth trends tied to the creation of AI infrastructure, as well as [the] aviation and defense theme.”

LockheedMartinStocks in the top 20 in the industrial index are part of the defense industry, which is booming as defense spending increases in the United States and around the world in the midst of many wars. The defense contractor this week reported quarterly earnings that beat both earnings and revenue, leading to a post-earnings rally of more than 10% on Thursday. LMT and similar RTX Corp.Both are up about 35% in the past year, with XLI’s fourth-largest holding.

The most popular industrial ETFs of 2026

(Source: ETFdb.com. net flow, year-to-date)

1. iShares Defense Industry Active ETF (IDEF): 4.4 billion dollars
2. State Street Industrial Select Sector SPDR (XLI): $3.6 billion
3. GlobalX Defense Tech ETF (SHLD): 2.6 billion dollars
4. First Trust RBA American Industrial Renaissance ETF (WEATHER): 2.5 billion dollars
5. Tema Space Innovators ETF (NASA): 2 billion dollars

Aerospace and defense companies make up 25% of XLI’s sector allocation and have gained momentum not only from rising defense spending but also from the recent popularity of space stocks and the long-term outlook for the space economy. But that momentum has faded, with the NASA ETF losing nearly 20% in the past month.

JP Morgan’s chief ETF strategist Jon Maier says defense and artificial intelligence development may be interconnected in an increasingly digital world; This is a good sign for industrialists. “Security and durability are really important, and that will play an increasingly bigger role,” he said on “ETF Edge.”

The traditional aviation sector is also represented in the industrial sector, including Boeing and Delta Air Lines, which are among the top ten XLI holdings. Delta CEO Ed Bastian recently told CNBC that conditions in its business remain strong, with continued high demand for air travel amid resilient consumer sentiment driven by persistently high airfares. Delta’s shares rose 45% last year despite a rise in oil prices that is now weighing on airline margins.

Maier added that at a time when investments in industrial sectors are at their peak, it is important to recognize that a significant portion of these trades in index funds such as XLI are passive, which shows investors’ confidence in the long-term horizon of the fund.

“The market is always forward-looking, and that’s what the stock price is really about – a cash flow of future earnings,” he said.

“Those who flow into [industrials] we were really strong [at] “17 billion dollars,” Maeir said, adding that there was also significant investor interest beyond the basic industrial sector index. “34% of the entire flow[s] We are actively managed.”

Disclaimer