The U.S. industrial sector has decoupled from semiconductors, the cornerstone of the AI trade. The XLI sector ETF has gained 8.8% year-to-date in 2026, compared to 64% for the SMH semiconductor fund. This divergence is explained by elevated valuations (23 times forward earnings versus 19 for the S&P 500), weakness in defense stocks (ITA down 10% over three months) and investor caution around data center construction. Caterpillar has fallen 23% over the past three months. Despite this decline, the sector has doubled in value since end-2022, adding $2.6 trillion in market capitalization, and some analysts view current levels as an opportunity.
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