What's Driving the 2026 Industrials Sector Rally?

If one were to take a trip to Wall Street and ask investors which sector of the S&P 500 is offering the most attractive opportunities beyond the tech sector, would they be surprised to hear industrials come in as a top response? After all, this would likely be the case.

Key Takeaways: Thus far this year, the industrials sector has done exceptionally well, with the State Street Industrial Select Sector SPDR ETF (XLI) up 16.50% year-to-date. Industrials are rallying from a variety of demand drivers, including AI infrastructure, manufacturing reshoring, defense spending, and much more. These drivers should cement the sector as an attractive long-term investment option, given the variety of applications that industrials offer.

The industrials sector has been on a tear this year. Just take a look at the State Street Industrial Select Sector SPDR ETF (XLI) — the fund is up 16.50% year-to-date, as of July 31, 2026. As a reminder, this fund focuses its investments towards the industrials sector of the S&P 500. Some may be wondering: what is going on with the industrials sector right now? Considering the macroeconomic picture we currently find ourselves in, what about industrials makes them such a good buy?

Backed by a Slew of Demand Drivers The answer to that question has layers to it — in a good way. To put it broadly, there is simply just a lot of demand for the industrials sector at the moment. To start, the AI buildout is certainly benefitting industrials companies a great deal. As many know at this point, AI expansion requires stronger infrastructure, which in turn means industrial machinery and electrical equipment are in demand. The demand doesn’t stop there, either. The push from the U.S. government to return manufacturing operations to domestic shores is clearly helping a variety of different key players in the sector. Additionally, geopolitical tensions have kept defense spending up, which naturally benefits industrials as well.

An Optimistic Long-Term Opportunity Set This is just scratching the surface of the industrials opportunity set. These factors, combined with other potential tailwinds like Federal infrastructure spending, could further push industrials companies in the right direction. Already, the broader investment community seems to recognize that XLI is offering a compelling opportunity this year. Between July 20, 2026 and August 20, 2026, XLI saw about $145 million in net inflows.