If anyone was wondering just how important AI is to industrial stocks, take a look at Wednesday's trading.
GE Vernova shares were down 11%, Vertiv stock was down 12%, Eaton shares fell 9%, Quanta Services stock dropped 12%, and Cummins stock fell a mere 4%.
The iShares Industrial ETF was down almost 2%, while the S&P 500 jumped 1.8%. Healthcare, financials, and consumer discretionary stocks, excluding Tesla, were doing well.
The reason industrials were dropping is obvious: Data center backlash. The Democratic congressional sweep makes it much more likely the trillion-dollar data center buildout will slow. That will hit revenue for all of the industrial companies involved in construction, power management, thermal management, and other parts of the data center.
GE Vernova, Cat, and Cummins provide power generation equipment. Eaton provides electrical and thermal management products. Quanta provides construction services. Peers of those firms, and other companies that sell everything from electrical connectors to optical cables, were down too.
The severity of the backlash, and what it will mean to earnings, is hard to say. Investors are taking a shoot-first-ask-questions-later approach.
To be sure, some industrial stocks will be worth buying after the drop. Probably not today. Wall Street will likely trim price targets and 2027 growth expectations.
Wall Street traders often talk about the rule of three. Wait three days after something bad happens. It isn't scientific, but it gives people a chance to catch their breath.
Investors might not have to wait much longer than that. Things have happened quickly. Cat stock, for instance, is down about 45% from its 52-week high reached in the summer.
Valuations are no longer elevated. The five stocks listed above trade for an average of 21 times expected earnings over the coming 12 months. The historical average -- before the data center boom -- was roughly 22 times. The group traded for an average of closer to 33 times earlier in 2026, before AI fears rose.
The data center boom isn't dead, just slowed. That might not be such a bad thing anyway. It gives capital markets time to digest funding requirements, eases cash flow requirements on hyperscalers, and puts less pressure on the electricity grid. That's the optimistic scenario.
If that becomes reality, investors can come back to their favorite industrial stocks after the dust settles in the coming weeks.
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