State Street Industrial Select Sector SPDR ETF (XLI)

On our desk, we are seeing a strange divergence. While Bank of America clients continued a net buying streak of U.S. equities, XLI just suffered its worst three-week outflow on record. It is trading at $183.57, which sits roughly 25.0% above its GF Value of $146.86. We have to question how long momentum can sustain this valuation disconnect.

Watching the macro tape, the 20% one-year gain in XLI clearly reflects a major shift from basic reshoring bets to direct AI infrastructure plays—specifically power, cooling, and grid equipment for hyperscalers. However, if hyperscaler capex guidance turns flat this fall, electrification leaders like Caterpillar, Eaton, and GE Aerospace will take the brunt of the correction first.

When assessing the portfolio construction, we note that XLI remains the default vehicle for institutional and retail exposure to U.S. industrials, holding around $30.1B to $33.8B in AUM with a low 0.08% expense ratio. The core challenge is balancing two competing supply chain drivers: AI data-center builds and defense re-arming.

From a strategy perspective, Carson Group's recent move to raise its SandP target implies investors should lean into technology, financials, and industrials. Even so, the recent industrial sell-off feels less like standard inflation fear and more like a reckoning with high debt, flat cash flows, and stretched valuations in giants like Caterpillar and Deere.

Looking closely at the underlying holdings, coordinated earnings beat-and-raise reports from names like CSX and RTX recently helped XLI claw back gains from a falling market and jump into a buy zone. Yet, we remain cautious about systemic exposure given that institutional guru 13F activity shows a deeply mixed picture with positions being actively trimmed by half of the holders.