According to CNBC, the S&P 500 industrials sector ETF (XLI) is up 8.8% this year through Thursday's close, while the VanEck Semiconductor ETF (SMH) has rallied 64%, with the gap widening since April 14 when XLI turned lower and SMH kept climbing. The divergence has been driven by elevated industrial valuations, caution around data center-linked names and declines in defense stocks, though DataTrek Research's Nicholas Colas said the sector offers a good risk-reward and should match or beat the market going forward.

FactSet data show industrials trade at 23 times forward earnings, above the S&P 500's 19 times and the sector's 10-year average of about 20. Caterpillar trades at 28 times forward earnings, compared with Nvidia at 18 times. Citi said industrials' premium reflects elevated growth expectations, while DataTrek pointed to weakness in defense stocks and caution around data center construction as additional pressures. The iShares U.S. Aerospace & Defense ETF (ITA) is down 10% over the past three months, Caterpillar has fallen 23%, GE Vernova is down 12% and GE Aerospace has dropped 13.7%.

Colas said upcoming third-quarter earnings and forward guidance next month could help revive the group if companies show strong backlogs and reliable earnings streams. DataTrek said pushback on AI data center construction should fade after the U.S. midterm elections, while Citi analyst Andrew Kaplowitz said AI and data center tailwinds should remain resilient and that it remains constructive on multi-industrials into late '26.