S&P 500 Industrials P/E Exceeds 30x as AI Data Center Buildout Drives Over 50% Share Gains
The S&P 500 industrials sector's price-to-earnings ratio has surpassed 30 times, well above its long-term average of about 20 times, as a surge in AI data center construction lifts demand for heavy machinery and electrical equipment. Alphabet raised its 2025 capital expenditure guidance to $195-205 billion. Caterpillar and GE Vernova, top holdings in the XLI ETF, have each gained over 50% this year, with Caterpillar up nearly 160% from its low two years ago. Lockheed Martin and RTX rose about 35% over the past year, while Delta Air Lines gained 45%.
The price-to-earnings ratio of the industrials sector in the S&P 500 has exceeded 30 times, significantly deviating from the sector's long-term historical average of nearly 20 times. U. S. corporations and the technology industry are racing to build artificial intelligence data centers. Alphabet, Google's parent company, said in its earnings report that its capital expenditure this year will reach $195 billion to $205 billion, up from its previous guidance range of $180 billion to $190 billion.
To meet the power demands of data centers, upgrading rural power grids is crucial. Building new substations, enhancing high-speed fiber-optic communications, and developing new energy-efficient battery technologies are all essential. Large quantities of power generation and backup power equipment, heavy construction machinery, and electrification control software have become necessary supplies for large-scale deployment.
Machinery and electrical equipment manufacturers, which account for 20.89% and 14.16% of XLI holdings respectively, have seen their shares rise this year. Caterpillar, the ETF's largest holding, and GE Vernova, its third-largest, have each gained more than 50% year-to-date. Caterpillar is up nearly 160% from its low two years ago. GE Vernova's backlog of orders stood at $176 billion as of the end of the second quarter. Emerson Electric, the 29th-largest holding in XLI, is trading nearly 20% higher than in July 2024. Hubbell, the 60th-largest holding, has gained 30% over the two-year period since July 2024.
Lockheed Martin, one of the top 20 constituents of the industrials index, belongs to the defense industry. Its shares rose more than 10% after its earnings release. Lockheed Martin and its peer RTX (Raytheon Technologies) have each gained about 35% over the past year. Aerospace and defense companies account for 25% of XLI's sector allocation. Traditional aviation is also a major part of the industrials sector, including Boeing, one of XLI's top ten holdings, and Delta Air Lines. Delta Air Lines' shares have risen 45% over the past year.