An old economy sector benefits from AI investment. Todd Gordon outlines how to play it
When investors think about the AI growth trade, their minds most likely go to semiconductors, hyperscalers, and even software. But there’s another group that has been participating in the growth trade breakout, and just recently even showed outperformance, creating a quieter AI revolution in this “old economy” sector. The industrial sector, often viewed as cyclical and more of a value sector, is going through a re-rating as Wall Street is shifting its perception, believing the AI trade cannot continue without steel, turbines, power infrastructure and aerospace engines. Besides the AI infrastructure buildout, the heaviest industry component of Industrials is aerospace and defense at 27.24%. The Industrials ETF (XLI) is also getting a boost from increased defense spending. Technically speaking, the XLI is rallying, but also facing a key technical resistance level on the weekly chart which, if it fails to hold as resistance (price ceiling), increases our bullish conviction. The March 2020 to Nov 2021 rally traveled 126%, which then set up a pullback in 2022. The next rally began in October 2022 and is just a stone’s throw away from another 126% measured move at $187. Last trade in XLI was $180.50. Above $187 and we’ll consider the measured move, equidistant resistance level as broken and we should be able to break into the $200’s. Turning to the daily chart, setting up a move to defeat the $187 resistance level is a traditional cup and handle pattern that is already in breakout move. What increases our conviction here is the lower panel showing the ratio of Industrials and the S & P 500 (XLI / SPY ) ratio that is setting up a breakout of its own. That means there’s a chance that industrials could be moving higher at a faster pace than the S & P 500 and in a portfolio manager’s world, that presents the opportunity for outperformance to our benchmarks! From here, we go to work and find the stocks that are leading the Industrials. You want to find the best stocks within the leading sectors compared to the indexes to include in your portfolios. Simply investing in the averages is setting yourself up for average returns. I ran a screen for Industrials stocks that met the following criteria: U.S. based companies Market capitalization > $1 billion EPS 1-year forward growth expected > 20% EPS 2-years out average analyst revision > 20% Revenue 1-year forward growth expected > 20% Revenue 2-years out average analyst revision > 20% Two industrials names Bloom Energy is a name I’ve covered multiple times in this column and have held for quite a long time. The most recent time I covered Bloom Energy was April 28, just before the company reported earnings, when the stock was trading at $228. I won’t rehash the key position Bloom Energy holds in on-site solid oxide fuel systems to power data centers that solves a huge bottleneck of massive delays for grid connections. In our most recent portfolio update that I wrote about last week , I increased our holdings in Bloom by 50%. Related, as described last week, I deployed half of planned technology allocations in the portfolio and am looking to add the next half. Bloom is setting up for its third breakout from consolidation while support at the 50 day moving average ($255) holds. Included below are the 1-, 2- and 3-year EPS analyst expectations that have jacked higher since the back half of last year, which is the fuel that powers this rally higher. The next name is one you’re probably not familiar with, Sterling Infrastructure (STRL) . We just added this name to our growth portfolio for the first time at a 1% starter size position. Sterling is a U.S. construction and infrastructure company that builds physical ground layers for the AI economy. Its E-infrastructure segment develops data center sites, semiconductor fabrication campuses and power generation facilities for hyperscalers, e-commerce giants, and other major manufacturers. With a combined backlog that surged 131% year-over-year to $5.15 billion as of Q1 2026 and full-year EPS guidance raised by nearly 35% following the last earnings beat, this is pure play on the infrastructure spending wave in the AI buildout. STRL has been consolidating well above a rising 50-day moving average. A break to new high is actionable with proper risk management in place. -Todd Gordon, Founder of Inside Edge Capital, LLC We offer active portfolio management and financial planning for retail investors, as well as regular market updates like the idea presented above. Visit us at https://www.insideedgecapital.com/cnbc Charts shown are Koyfin. 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