The S&P 500 industrials sector trades at a price-to-earnings ratio above 30, a level investors more often associate with tech. The AI data center buildout, the power grid spending behind it, and rising defense budgets have pushed machinery, electrical equipment, and aerospace names to the front of the index.
Old-guard machinery and electrical equipment makers are now priced like high fliers. The industrials sector of the S&P 500 trades at a price-to-earnings ratio above 30, well above its long-term average, which is closer to 20.
Investors more often associate that valuation with high fliers. Cinthia Murphy, director of research at VettaFi, said on “ETF Edge” that the Industrial Select Sector SPDR’s valuations run as high as tech’s.
AI infrastructure spending drives the sector
Alphabet forecast capex of $195 billion to $205 billion for this year, up from prior guidance of $180 billion to $190 billion, and warned the figure could go even higher in 2027. McKinsey estimates suggest global data center spending could reach nearly $8 trillion by 2030, with the vast majority dedicated to data center infrastructure and IT equipment. That backbone is what pushed up industrials, according to Murphy: “AI is a tech play, but nothing happens without the build out of the infrastructure”.
Machinery and electrical equipment lead the gains
Machinery and electrical equipment producers make up 20.89% and 14.16% of XLI holdings, respectively, and both groups have surged as power generation, construction machinery, and electrification software became necessities for scaling. Caterpillar, the ETF’s top holding, and GE Vernova, the third-largest holding in the industrials index, are both up over 50% this year. Caterpillar alone is up nearly 160% from where it was two years ago.
Smaller holdings moved too. Hubbell, the 60th-largest holding, is up 30% in the two-year period dating back to July 2024. Emerson Electric, the 29th-largest, trades nearly 20% above where it was in July of 2024 despite slight losses over the past year.
Defense and aerospace extend the rally
Aerospace and defense companies comprise 25% of XLI’s sector allocation. Lockheed Martin beat on both earnings and revenue this week, leading to a post-earnings rally of over 10% on Thursday. Lockheed and RTX Corp., the fourth-largest holding in XLI, are both up roughly 35% over the past year.
But that momentum has faded in space stocks, with the Tema Space Innovators ETF down close to 20% over the past month. Money has still gathered across the sector: over 60 industrials ETFs have collectively seen about $23 billion in net inflows year-to-date, Murphy wrote in an email to CNBC. Jon Maier, J.P. Morgan’s chief ETF strategist, put flows into industrials at $17 billion, 34% of it actively managed.
Source: CNBC
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