One key part of the AI trade has decoupled from the rest. Why that is, and whether it can come back
After falling sharply over the past few months, industrials stocks could be poised for a rebound.
TL;DR
- Industrials sector ETF (XLI) is up 8.8% in 2026, while Semiconductor ETF (SMH) is up 64%.
- Divergence accelerated after mid-April, with XLI down 3% and SMH up 33% since April 14.
- Reasons for underperformance include high industrials valuations (23x forward earnings vs. S&P 500's 19x), investor caution on data center construction, and declines in defense stocks.
- Some analysts see the underperformance as an opportunity, expecting industrials to perform in line with or better than the market.
- Defense stocks, a key component of industrials, have weakened due to geopolitical outlook and anticipation of potential Iran war resolution.
- Data center projects face scrutiny over energy costs, power, and community impact, affecting suppliers and construction services.
- 57% of industrials sector's market value increase since end of 2022 came from AI and aerospace companies, which have recently faced pressure.
- Industrials experienced record outflows and were considered a 'crowded' and 'expensive' sector.
- Third-quarter earnings and forward guidance are expected to be key drivers for a potential industrial rebound.
- Long-term demand for AI data centers remains intact, and pressure may subside after U.S. midterm elections.
- The U.S. economy's durability, with strong earnings and labor market, supports industrials long-term.
- CNBC Pro identified Axon Enterprise, Boeing, and C.H. Robinson as stocks with buy ratings and significant upside potential.