Industrials Sector Underperforms AI-Focused Chipmakers Amid Valuation Concerns and Market Shift
The industrials sector has diverged sharply in performance from chipmakers — the core of the artificial intelligence trade. While the VanEck Semiconductor ETF (SMH) surged by 64% year-to-date through mid-September, the S&P 500 Industrials ETF (XLI) gained only 8.8%. Since April 14, XLI has fallen nearly 3%, while SMH climbed another 33%. Analysts attribute this gap to high valuations for industrials, cautious sentiment toward data center-linked stocks, and a decline in defense sector performance. Industrials trade at a forward PE of 23 — higher than the S&P 500’s multiple of 19. Caterpillar (CAT), a key industrial name, trades at an even steeper 28 times earnings compared to Nvidia's (NVDA) more modest valuation. The iShares U.S. Aerospace & Defense ETF (ITA) has dropped by double digits in recent months amid geopolitical uncertainty and regulatory scrutiny of data center construction projects. Despite the underperformance, some analysts see potential for a rebound if companies deliver strong Q3 earnings with solid backlogs and guidance. Nicholas Colas from DataTrek Research suggests industrials could match or outperform broader market returns going forward.
Tickers: $CAT $ITA $NVDA $SMH $XLI
Topics: AI trade ETFs industrials semiconductors valuation