S&P 500 industrials match tech valuations on AI buildout
The S&P 500 industrials sector has surged to a price-to-earnings ratio above 30 as massive capital expenditure plans for AI data centers and rising defense budgets drive record ETF inflows.
S&P 500 industrials are trading at a price-to-earnings ratio above 30, breaching their long-term average of roughly 20 to match tech sector valuations. This repricing reflects a flood of capital into the sector as investors bet on the physical buildout required for artificial intelligence.
Tech giants are committing unprecedented sums to data centers. Alphabet recently raised its capex guidance for this year to $195 billion to $205 billion, warning of even higher figures in 2027. McKinsey & Company estimates global data center spending will approach $8 trillion by 2030, focusing heavily on infrastructure and IT equipment. "This is becoming the largest infrastructure buildout in human history," Nvidia CEO Jensen Huang wrote in a March blog post.
The spending cascade is lifting machinery and electrical equipment makers, which account for over 35% of the State Street Industrial Select Sector SPDR (XLI). "AI is a tech play, but nothing happens without the build out of the infrastructure," said Cinthia Murphy, director of research at VettaFi. "There's a whole backbone infrastructure that needs to be built, and that has really pushed up industrials."
Caterpillar, XLI's top holding, has gained more than 50% this year and nearly 160% over two years. GE Vernova, the third-largest holding, carries a $176 billion backlog despite a recent wind-sector selloff. The buildout is pushing into rural areas where new facilities demand up to 20 times the existing local power capacity, requiring new electrical substations, fiber networks, and backup generation.
AI is not the sole catalyst. Aerospace and defense represent 25% of XLI, buoyed by geopolitical tensions and increased military spending. Lockheed Martin and RTX Corp. have both climbed roughly 35% over the past year, with Lockheed rallying more than 10% this week after beating earnings estimates. "Security and resilience is really important, and that's going to play even bigger and bigger of a role," said J.P. Morgan chief ETF strategist Jon Maier.
Investor positioning reflects this dual tailwind. "There are over 60 industrials ETFs that fall into that sector category, and collectively they've seen about $23 billion in net inflows year-to-date," Murphy noted. XLI alone captured $17 billion, with 34% of total sector flows going to actively managed funds. "The market is always forward-looking, and that's really what a stock price is – the cash flow of future earnings," Maier said.
