The industrial sector is experiencing a dramatic revaluation as the artificial intelligence infrastructure buildout reshapes investor expectations. The industrials sector of the S&P 500 now trades at a price-to-earnings ratio above 30, a valuation level typically reserved for high-growth technology companies and well above the sector’s long-term average near 20.
“If you look at Industrial Select Sector SPDR XLI from State Street, its valuations are really high relative to the S&P 500,” Cinthia Murphy, director of research at VettaFi, said on CNBC’s “ETF Edge.” “It’s as high as tech, so it really is a sector that has really had its moment in the sun and picked up a lot of attention.”
Massive Capital Expenditure Driving Demand
The revaluation reflects extraordinary corporate spending on AI infrastructure. Alphabet disclosed Wednesday that its capital expenditure forecast for this year ranges from $195 billion to $205 billion, up from prior guidance of $180 billion to $190 billion. The company cautioned those spending numbers could climb even higher in 2027.
According to McKinsey & Company estimates, global spending on data centers could reach nearly $8 trillion by 2030, with the vast majority dedicated to data center infrastructure and IT equipment. Nvidia CEO Jensen Huang characterized the scale in a March blog post, calling it “the largest infrastructure buildout in human history.”
“AI is a tech play, but nothing happens without the build out of the infrastructure,” Murphy explained. “There’s a whole backbone infrastructure that needs to be built, and that has really pushed up industrials.”
Individual Stock Performance
The sector’s largest holdings have posted substantial gains. Caterpillar, the top holding in XLI, has climbed nearly 160% over the past two years and is up over 50% this year alone. GE Vernova, the third-largest holding, has also gained more than 50% this year, though it faced a selloff this week following earnings despite holding a $176 billion business backlog at the end of the second quarter.
Even smaller positions within the index are participating in the rally. Emerson Electric, the 29th-largest holding, trades nearly 20% higher than July 2024 levels. Hubbell, the 60th-largest holding, has risen 30% over the two-year period from July 2024.
Beyond AI: Defense and Aerospace Momentum
The industrial sector’s strength extends beyond artificial intelligence infrastructure. Aerospace and defense companies, which comprise 25% of XLI’s sector allocation, have gained from increased global defense spending amid multiple ongoing conflicts.
Lockheed Martin reported quarterly earnings this week that beat expectations on both earnings and revenue, sparking a post-earnings rally exceeding 10% on Thursday. Both Lockheed Martin and RTX Corp., the fourth-largest holding in XLI, have risen roughly 35% over the past year.
Traditional aviation also contributes to the sector’s momentum. Delta Air Lines has seen its shares climb 45% over the past year, with CEO Ed Bastian recently telling CNBC that business conditions remain strong with high demand for air travel amid resilient consumer sentiment.
Investor Flows Reflect Confidence
According to Murphy, over 60 industrials ETFs collectively attracted approximately $23 billion in net inflows year-to-date. The sector has benefited from both performance and asset gathering momentum as investors focus on secular growth trends tied to AI infrastructure and aerospace and defense themes.
Jon Maier, J.P. Morgan’s chief ETF strategist, noted that flows into industrials have reached $17 billion, with 34% coming through actively managed funds. He emphasized that in an increasingly digital world, security and resilience considerations may further link defense and AI buildout, a dynamic that could continue supporting industrial valuations.
“The market is always forward-looking, and that’s really what a stock price is – the cash flow of future earnings,” Maier said on “ETF Edge,” highlighting that significant passive investment in funds like XLI indicates investor confidence in the sector’s long-term prospects.
Source: www.cnbc.com — https://www.cnbc.com/2026/07/26/best-ai-stocks-market-sp500.html
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