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Is the Industrial Sector Overlooked Amid the AI Hype?

Justin A
4 min read
Is the Industrial Sector Overlooked Amid the AI Hype?

As artificial intelligence and tech stocks dominate headlines and investor attention, another corner of the market is quietly gaining ground: industrial sector stocks. While Silicon Valley dazzles with innovation, companies making the world’s infrastructure tick are seeing fresh momentum — and some investors are starting to take notice.

The Industrial Sector: What’s Driving the Resurgence?

The industrial sector includes companies involved in manufacturing, construction, transportation, machinery, and aerospace. In 2023 and 2024, the S&P 500 Industrials Index delivered a total return of over 15%, outperforming several other major sectors outside of technology. So, what’s fueling this renewed strength?

  • Infrastructure Spending: The U.S. Infrastructure Investment and Jobs Act, signed in 2021, is funneling over $1 trillion into roads, bridges, rail, and utilities through 2026. This spending benefits companies like Caterpillar and Deere & Co..
  • Onshoring and Supply Chain Resilience: Geopolitical tensions and pandemic-era disruptions have pushed companies to bring manufacturing back to the U.S. or allied countries, boosting demand for industrial equipment and services.
  • Defense and Aerospace: Rising global security concerns are driving higher defense budgets, supporting companies such as RTX Corp. and Boeing.
  • Industrial Automation: Ironically, the AI revolution is creating demand for automation equipment, benefitting industrials that supply robotics and factory tech.

While AI stocks capture the spotlight, industrial sector stocks are quietly building the backbone of tomorrow’s economy.

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How Industrial Sector Stocks Are Outperforming

Despite lacking the buzz of tech, industrial sector stocks have delivered robust performance. In the trailing twelve months (as of June 2024), the Industrial Select Sector SPDR Fund (XLI) rose approximately 18%, compared to 12% for the S&P 500 ex-tech. Dividend yields also tend to be higher, with many industrials offering payouts in the 1.5-2.5% range — a draw for income investors.

Much of this outperformance is tied to tangible catalysts. For example, Caterpillar saw 2023 revenues jump 13% year-over-year as infrastructure projects accelerated. Similarly, Deere & Co. benefited from both construction and agricultural equipment demand, posting record net income in fiscal 2023.

It’s not just the U.S. story, either: European industrials like Siemens and Japanese leaders such as Fanuc are riding global trends in automation and electrification.

Key Drivers for Industrials in 2026 and Beyond

Looking ahead to 2026, several secular trends point to continued strength for industrial sector stocks:

  • Infrastructure Backlog: With federal projects ramping up, many industrials have multi-year order backlogs that offer earnings visibility.
  • Manufacturing Renaissance: The U.S. is on track to open dozens of new semiconductor and battery plants, requiring equipment and engineering support.
  • Energy Transition: Renewables and grid modernization are creating demand for industrial services and equipment.
  • Global Reindustrialization: Emerging markets are investing heavily in logistics, transportation, and automation.

Analysts at Goldman Sachs forecast that U.S. industrial production growth could top 3% annually through 2026, outpacing the broader economy. This puts companies with exposure to these trends in a strong position for revenue and earnings growth.

How to Analyze Industrial Sector Stocks

For investors considering a move into industrial sector stocks, a disciplined analysis is essential. Here are key factors to evaluate:

  • Order Backlog: A large and growing backlog can indicate future revenue stability.
  • Operating Margins: Look for companies with margin expansion, signaling pricing power or efficiency gains.
  • Capital Expenditure Trends: High investment can be a double-edged sword — it may fuel growth, but also strain cash flow.
  • Diversification: Companies with exposure to multiple end-markets (e.g., construction, defense, energy) may be more resilient.
  • Dividend Policy: Many industrials reward shareholders with steady dividends and buybacks.

It’s also wise to monitor macroeconomic indicators like the ISM Manufacturing Index and construction spending trends, which can offer early clues to sector momentum.

Key Takeaways: Why Industrials Deserve a Second Look

  • Industrial sector stocks are quietly outperforming as infrastructure and onshoring trends accelerate.
  • The sector offers both growth and income potential, with many stocks trading at reasonable valuations.
  • Careful analysis of order backlogs, margins, and end-market exposure is crucial before investing.
  • Investors seeking diversification beyond tech may find industrials a compelling addition to their portfolio.

While AI and tech stocks continue to captivate Wall Street, industrial sector stocks are quietly building the foundation for long-term growth. For investors willing to look beyond the headlines, the industrials sector offers a blend of stability, innovation, and upside potential that shouldn’t be ignored.