The S&P 500 industrials sector is trading at a forward P/E ratio above 30 — matching tech valuations — as AI data center construction and defense spending drive unprecedented investor demand into machinery, electrical equipment, and aerospace companies.
The S&P 500 industrials sector is trading at a forward price-to-earnings ratio above 30 — a level historically associated with high-growth technology companies — as spending on artificial intelligence data centers and related power infrastructure drives investor demand into corners of the market once considered staid.
The industrials sector's long-term average P/E ratio sits closer to 20, making the current valuation a significant departure from historical norms.
"If you look at XLI from State Street, its valuations are really high relative to the S&P 500," said Cinthia Murphy, director of research at VettaFi. "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," Murphy said.
The driver is straightforward: building AI data centers requires physical infrastructure — electrical substations, high-speed fiber networks, power generation equipment, construction machinery, and energy storage technology — much of which is manufactured or deployed by industrial companies.
Alphabet, reporting earnings this past week, raised its capital expenditure forecast for 2026 to a range of $195 billion to $205 billion, up from prior guidance of $180 billion to $190 billion, and warned that spending could climb further in 2027. McKinsey & Company estimates suggest global data center spending could reach nearly $8 trillion by 2030.
"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," Nvidia CEO Jensen Huang wrote in a March blog post. "This is becoming the largest infrastructure buildout in human history."
The push to construct data centers — many in rural areas where peak power grid capacity is comparatively limited — has created demand for facilities that consume up to twenty times existing local power capacity. That demand has fueled share price gains across machinery and electrical equipment companies, which account for 20.89% and 14.16% of XLI's holdings, respectively.
Caterpillar, the ETF's top holding, is up nearly 160% from two years ago and more than 50% year-to-date. GE Vernova, the third-largest XLI holding, has also gained more than 50% this year, though a selloff followed its latest earnings report despite a $176 billion business backlog at the end of the second quarter — the result of headwinds in its wind power business.
Further down the index, Emerson Electric, the 29th-largest XLI holding, trades roughly 20% above its July 2024 level, while Hubbell, the 60th-largest holding, is up 30% over the same two-year period.
Aerospace and defense companies, which comprise 25% of XLI's sector allocation, have added a separate catalyst. Lockheed Martin, one of the top 20 stocks in the industrials index, reported quarterly earnings this week that beat on both earnings and revenue, sending shares up more than 10% on Thursday. Lockheed and peer RTX Corp., the fourth-largest XLI holding, are both up roughly 35% over the past year.
Investor flows into industrials ETFs reflect the shift. According to Murphy, more than 60 industrials ETFs collectively attracted approximately $23 billion in net inflows year-to-date. The iShares Defense Industrials Active ETF led all industrial ETFs with $4.4 billion in net inflows, followed by State Street's XLI at $3.6 billion, the GlobalX Defense Tech ETF at $2.6 billion, the First Trust RBA American Industrial Renaissance ETF at $2.5 billion, and the Tema Space Innovators ETF at $2 billion, according to ETFdb.com data.
The elevated valuations arrive alongside rising public resistance to data center construction. An Emerson College poll released this week found that only 27% of Americans support data centers being built in or near their communities, with 63% opposed — a marked deterioration from a December 2025 poll in which 33% expressed support and 42% were opposed.
How long industrial valuations can sustain a premium more commonly associated with software companies will depend in large part on whether AI capital expenditure commitments hold — a question megacap technology earnings reports due this week from Apple, Amazon, Meta Platforms, and Microsoft may begin to answer.
TechEchelon Staff bylines are produced collectively by the newsroom for short, breaking, and wire-style coverage. Longer-form reporting is published under the responsible reporter's name.
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