Industrial Stocks Ride AI Wave with Performance Mirroring Chip Sector

Optimism that industrial firms stand to benefit from the AI boom has propelled the sector to record momentum. However, concerns are growing that the sector's ties to AI may now be too strong.

A measure tracking the 45-day correlation between the S&P 500 Industrials Index and the Philadelphia Semiconductor Index currently sits at 0.75, nearing its highest level since June. A reading of 1 indicates perfectly synchronized movements. The S&P 500 Industrials Index includes companies like Deere & Company and Fastenal.

This near-lockstep performance was evident on Monday: chipmakers like Qualcomm and Micron Technology helped lift the S&P 500, while industrial firms such as power equipment provider Vertiv Holdings were among the best performers in the benchmark index. On Tuesday, as U.S. stocks fell in early trading, industrials ranked second-to-last among sectors, only outperforming information technology.

Many industrial companies provide the critical physical infrastructure needed to build and operate data centers, positioning the sector as a secondary beneficiary of AI. This also makes the sector, already sensitive to broader economic cycles, more vulnerable to risks stemming from a potential slowdown in AI demand.

"If AI is the sole engine driving the stock market and the economy, then any 'sputter' ultimately becomes a bigger problem," said Michael O’Rourke, Chief Market Strategist at JonesTrading Institutional Services. "Weakness in any key player in this space will have an impact on the whole."

This interconnectedness presents a joint test for both tech and industrial stocks as NVIDIA prepares to report earnings next week.

In a May 7 note to clients, Neil Dutta, Head of Economic Research at Renaissance Macro Research LLC, wrote that 15 non-tech companies with a combined market cap of $2 trillion now see their stock prices move in tandem with AI capital expenditure. "If the AI cycle cools, the wealth effect drag on consumption will not be limited to the Magnificent Seven tech stocks."

Industrial firms including Vertiv, Eaton, Caterpillar, and even engine manufacturer Cummins rank high on the list. Data compiled by Renaissance Macro shows these stocks share a correlation of over 60% with the VanEck Semiconductor ETF.

"These are not tech stocks. They are trading like semiconductor stocks because their order books have become AI capital expenditure order books," Dutta noted, pointing out that Caterpillar sells backup generators to data centers, while Vertiv provides cooling and power management equipment.