S&P 500 industrials AI trade sends valuations toward tech levels

The S&P 500 industrials AI trade is giving a traditionally old-economy sector a tech-style valuation. CNBC reported that the industrials sector is trading at a forward price-to-earnings ratio above 30, compared with a long-term average closer to 20, as investors chase companies tied to data centers, power equipment, defense and space.

A forward price-to-earnings ratio compares a stock or sector’s current price with expected earnings over the next year. A higher number often means investors are paying more today because they expect stronger profit growth later, though it also leaves less room for disappointment.

Cinthia Murphy, director of research at VettaFi, said on CNBC’s “ETF Edge” that the Industrial Select Sector SPDR ETF, known by ticker XLI, has valuations that are high relative to the S&P 500. She said the sector’s valuation is now comparable with technology and has drawn much more investor attention.

Why are S&P 500 industrials rising with AI?

AI needs physical infrastructure before software companies can sell more computing power. Data centers require construction machinery, electrical equipment, substations, fiber networks, backup power and software for electrification, which puts industrial companies directly in the path of spending by large technology firms.

Alphabet raised its 2026 capital spending forecast this week to a range of $195 billion to $205 billion, up from its earlier estimate of $180 billion to $190 billion, CNBC reported from the company’s earnings update. Alphabet also warned that spending could rise further in 2027.

McKinsey & Company has estimated that global data center spending could approach $8 trillion by 2030, with most of that money going toward infrastructure and IT equipment. Nvidia CEO Jensen Huang said in a March blog post that the industry is only a few hundred billion dollars into the buildout and that trillions of dollars in infrastructure still need to be built.

The power problem is central to the trade. CNBC reported that many future data center projects are expected in rural areas, where power grids often have limited peak capacity. New facilities can require far more electricity than local systems currently support, creating demand for grid upgrades and industrial equipment, even as Reuters has reported rising local concern about power strain and electricity costs.

Within XLI, machinery companies account for 20.89% of holdings and electrical equipment companies account for 14.16%, according to CNBC. Caterpillar, the fund’s largest holding, and GE Vernova, its third-largest holding, are both up more than 50% this year. Caterpillar has climbed nearly 160% over two years, while GE Vernova ended the second quarter with a $176 billion backlog, CNBC reported.

The rally is broader than AI. Murphy told CNBC by email that more than 60 industrials ETFs fall into the sector category and have attracted about $23 billion in net inflows this year. She said investors are also buying themes tied to aerospace and defense.

ETFdb.com data cited by CNBC showed the largest 2026 net inflows among industrials ETFs went to:

• iShares Defense Industrials Active ETF, or IDEF: $4.4 billion
• Industrial Select Sector SPDR, or XLI: $3.6 billion
• GlobalX Defense Tech ETF, or SHLD: $2.6 billion
• First Trust RBA American Industrial Renaissance ETF, or AIRR: $2.5 billion
• Tema Space Innovators ETF, or NASA: $2 billion

Defense names have added another support. Lockheed Martin reported quarterly earnings this week that topped earnings and revenue expectations, according to CNBC, and its shares rallied more than 10% on Thursday. Lockheed and RTX are each up about 35% over the past year.

J.P. Morgan chief ETF strategist Jon Maier said on CNBC’s “ETF Edge” that security and resilience are becoming more important in a digital economy. He also said industrials have taken in $17 billion of flows, with 34% going to actively managed strategies, showing investor interest beyond broad sector funds.

This story draws on original reporting from CNBC.