Industrial Sector Surges on AI and Defense Themes

The industrial sector is no longer seen as just a traditional group of companies that make railroads and engines. With the advent of artificial intelligence, investors are now willing to pay a premium for companies in this sector that have exposure to AI infrastructure buildout and defense contracts.

According to DataTrek Research, industrials now trade at 25.2x forward earnings, which is above their 10-year average of 19.9x. This is higher than the consumer discretionary and information technology sectors, as well as the S&P 500 itself.

The top names in the group tell the story: Caterpillar trades at 30.5x, General Electric at 43.9x, RTX at 30.1x, GE Vernova at 53.0x, Eaton at 30.4x, Union Pacific at 22.2x, and Parker Hannifin at 30.1x.

These multiples do not reflect the traditional railroads, engines, and factories of the industrial sector. Instead, they illustrate how bullish investors have become on AI and defense themes. Companies like Caterpillar and GE Vernova are now in the data center business, while RTX, General Electric, and Parker Hannifin sell into defense budgets.

However, not all industrial companies are benefiting from these trends. Uber and Union Pacific trade at significantly lower multiples of 17x and 22x respectively, as they have little to do with either major theme.