Industrial companies are experiencing an unexpected windfall as artificial intelligence (AI) data center construction drives unprecedented demand for power infrastructure, electrical equipment, and construction machinery. The S&P 500 industrials sector now trades at a price-to-earnings ratio above 30, matching valuations typically reserved for high-flying technology stocks and far exceeding the sector's historical average of around 20.

What's Driving the Industrial Stock Rally?

The surge stems directly from the massive capital investments required to build AI infrastructure across the United States. Tech giants like Alphabet are spending at unprecedented levels; Alphabet recently raised its 2026 capex forecast to between $195 billion and $205 billion, up from an earlier guidance of $180 billion to $190 billion. McKinsey & Company estimates suggest global spending on data centers could reach nearly $8 trillion by 2030, with the vast majority dedicated to infrastructure and IT equipment.

This buildout requires far more than just servers and chips. Companies need new electrical substations, strengthened fiber internet capabilities, power generation equipment, backup systems, construction machinery, and electrification software. The scale is staggering; many rural data center projects are expected to consume up to twenty times the existing power capacity of their local grids.

"AI is a tech play, but nothing happens without the build out of the infrastructure. There's a whole backbone infrastructure that needs to be built, and that has really pushed up industrials," said Cinthia Murphy, director of research at VettaFi.

Cinthia Murphy, Director of Research at VettaFi

Which Industrial Companies Are Benefiting Most?

Machinery and electrical equipment manufacturers, which comprise 20.89% and 14.16% of the Industrial Select Sector SPDR (XLI) index respectively, have seen the most dramatic gains. Caterpillar, the index's top holding, has surged over 50% this year and is up nearly 160% compared to two years ago. GE Vernova, the third-largest holding, has also climbed over 50% this year, buoyed by bookings related to the AI buildout despite recent headwinds in the wind power sector.

Beyond the heavyweights, smaller industrial players are also capitalizing on the trend. Emerson Electric, ranked 29th in XLI, is trading nearly 20% higher than it was in July 2024. Hubbell, the 60th-largest holding, has gained 30% over the same two-year period.

How to Understand the Industrial Sector's New Role in AI Infrastructure

• Power Grid Expansion: Rural areas across the U.S. require new electrical substations and grid reinforcement to handle data centers that demand exponentially more power than existing infrastructure can supply, creating demand for electrical equipment manufacturers.
• Construction and Equipment Needs: Building this infrastructure requires heavy machinery, construction equipment, and specialized tools, benefiting companies like Caterpillar that manufacture these products.
• Energy and Backup Systems: Data centers need reliable power generation, battery storage technology, and backup systems, driving sales for companies specializing in energy equipment and electrification solutions.

Investor confidence in this trend is reflected in the flow of capital into industrials. Over $17 billion has flowed into industrial sector funds, with 34% of those flows going into actively managed funds rather than passive index trackers. Across all industrials-focused exchange-traded funds (ETFs), approximately $23 billion in net inflows arrived year-to-date, indicating sustained investor belief in the sector's long-term growth.

The buildout is still in its early stages. Jensen Huang, CEO of Nvidia, noted in a March blog post that only a few hundred billion dollars have been invested so far, with trillions more needed. He called this "the largest infrastructure buildout in human history".

Jensen Huang, CEO of Nvidia

However, the expansion faces headwinds. Public opposition to data center construction is rising in many communities, driven by concerns about strained power grids and climbing electrical costs. Despite these challenges, the financial incentives remain enormous, and industrial companies are positioned to capture a significant share of the spending as the AI infrastructure race accelerates.