The market is paying up for picks and shovels.
For years, technology stocks were the clear elite when it came to valuations. Not anymore. The industrial sector of the S&P 500 now trades at a forward price-to-earnings ratio above 30.
That is a lot higher than its typical average closer to 20. For context, that kind of multiple used to belong to software companies, not companies that build bulldozers and power equipment.
A director of research at VettaFi, Cinthia Murphy, stated simply. "It's as high as tech, so it really is a sector that has had its moment in the sun and picked up a lot of attention."
What changed? Massive spending on artificial intelligence infrastructure. AI needs data centers, and data centers need power, cooling, and heavy equipment.
That money is flowing to industrial companies in a big way. Caterpillar and GE Vernova have each jumped more than 50% this year alone. Caterpillar has climbed nearly 160% over the past two years.
GE Vernova, the energy equipment company, had $176 billion in unfilled orders at the end of the second quarter.
The numbers behind this trend are staggering.
Get the market news that matters in a five-minute read with Market Briefs, our free daily newsletter
Alphabet, the parent company of Google, now expects to spend between $195 billion and $205 billion in 2026. That is up sharply from its previous forecast of $180 billion to $190 billion, and the company hinted it could go even higher in 2027.
Jensen Huang, CEO of Nvidia, described the size of what is coming. "We have only just begun this buildout. We are a few hundred billion dollars into it. Trillions of dollars of infrastructure still need to be built."
According to McKinsey & Company, worldwide data center expenditures might approach $8 trillion by 2030. Most of the future projects are planned for rural areas, which will require major expansions to local power grids. That means more business for companies like Emerson Electric and Hubbell, which make electrical equipment and industrial technology.
Emerson Electric is up nearly 20% from its price in July 2024. Hubbell has risen 30% in the two years since.
Defense and aerospace stocks are riding the wave too. Lockheed Martin and RTX Corp. have each climbed around 35% over the past year. Even Delta Air Lines, which sits in the industrial sector, has seen shares rise 45%. Jon Maier, chief ETF strategist at J.P. Morgan, noted that security and resilience are becoming bigger themes. "Security and resilience is really important, and that's going to play even bigger and bigger of a role."
Investors are betting hard on the trend. Industrial ETFs have pulled in $23 billion in net inflows so far this year. The iShares Defense Industrials Active ETF alone has seen $4.4 billion.
The State Street Industrial Select Sector SPDR, known as XLI, has taken in $3.6 billion. Even a niche fund like the Tema Space Innovators ETF, ticker NASA, has collected $2 billion. That fund has fallen roughly 20% in the last month, showing that not all industrial stocks rise consistently.
The easy takeaway is that industrial stocks are not a sleepy corner of the market anymore. They are getting the same kind of attention and the same kind of price tag as tech stocks.
The catch: forward earnings multiples above 30 mean prices already reflect a lot of future growth. If that growth does not show up as expected or if spending slows down, those stocks could get hit. The market is always forward-looking, as Maier pointed out. "The market is always forward-looking, and that's really what a stock price is - the cash flow of future earnings."
Still, the spending is real and it is happening now. Alphabet is writing big checks. Power grids need upgrades.
Data centers need to be built. All of that work flows to industrial companies.
For investors, the question is not whether the buildout is happening. It's whether the stocks already priced in the next few years of it. As with any hot sector, the ones that do well over the long run tend to be the companies that actually deliver on those expectations - not just the ones that talk about them.
Join Market Briefs, our free daily newsletter, for a quick daily rundown of the markets
