Momentum reversal is ringing alarm bells for industrial stocks

Concerned that capital spending on data centres may not meet sky-high hopes, traders have dumped chipmakers and power equipment names alike. Photo by Michael M. Santiago/Getty Image

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A sudden reversal in momentum for previously high-flying shares of industrial companies over the past three weeks has some investors bracing for more pain ahead.

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The S&P 500 Industrials index has tumbled about 6.1 per cent since as of Tuesday, reaching its last record on Aug. 14 as the Iran war once again pushed up oil prices and the artificial intelligence trade went into reverse.

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Technical alarm bells have started to ring. The selloff has dragged the index below its 50-day and 100-day moving averages, measures of its short-term and medium-term price trends.

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“It is likely that breaking below these moving averages steepens the decline in the short term,” said Brian Mulberry, chief market strategist at Zacks Investment Management. The index is now likely to test its 200-day average, a “key level of support” that is about 2.5 per cent below where it’s trading now, Mulberry said.

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Mulberry blames the selloff on a breakdown in the momentum trade that had powered the sector to its recent highs, while others on Wall Street point a finger at economic forces.

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Oil prices have resumed their march higher as shipping through the Strait of Hormuz remains disrupted, keeping inflation expectations and long-term bond yields elevated. That’s a toxic cocktail that threatens to increase production prices and the costs that capital-intensive manufacturers pay to borrow money, while dealing a blow to the broader economy that drives their sales.

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And these headwinds are swirling as the industrials group trades at some 23.7 times estimated earnings for the next 12 months, a premium to the broader S&P 500 index’s multiple of 19.4.

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“It’s a recipe for a pullback,” said Brian Sponheimer, a portfolio manager at Gabelli Funds. “If you’re a trader, it makes the path of least resistance pressing the sell button.”

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Still, there are signs that so many investors have already hit the sell button that the worst of the declines could be over. In a note last week, Bank of America Corp. flagged “capitulation” among its clients, who have dumped shares in the sector to a degree never before seen in data going back to 2008.

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And the fundamentals look like they’re holding up for now, meaning it’s possible the retreat over the last three weeks may end being a short-lived correction rather than the start of a serious downturn. The gauge of large-cap industrials is still up 13 per cent in 2026, building on last year’s 18 per cent gain.

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U.S. manufacturing activity grew for an eighth consecutive month in August, although the pace of expansion slowed somewhat.

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Yet like so much of the stock market, the ultimate fate of industrial stocks may come down to the state of the the artificial-intelligence trade that was previously an engine for the sector. Technology companies are pouring hundreds of billions of dollars into the data-centre buildout, creating demand for power generators, electrical equipment and construction machinery.