From Big Tech to Heavy Industry

The market euphoria surrounding artificial intelligence, which has propelled the S&P 500 to record highs, is no longer confined to Big Tech. A new, powerful investment theme is emerging from the immense energy demands of the AI build-out. As tech giants race to deploy power-hungry data centers, they are confronting an overstressed US power grid, forcing them to build their own on-site power solutions. This strategic shift is creating a significant and unexpected revenue stream for America’s industrial giants, who are now becoming a critical backbone of the AI revolution.

Caterpillar’s Power Generation Windfall

The most recent evidence of this trend came from Caterpillar (CAT), which posted a powerful third-quarter earnings beat. While the industrial giant saw strong demand across its business lines, the standout performer was its power generation machinery. Sales of reciprocating engines—used for both primary and backup power for data centers—notched a 33% year-over-year increase. CEO Joe Creed stated that the company sees this demand only growing, calling the current environment the “early stages of the prime power opportunities.” This confidence is backed by capital, with Creed noting, “that’s why we’re putting the capacity in.” The market reacted decisively, sending CAT stock up over 11% post-earnings, and prompting Bank of America to boost its price target to $650.

A Sector-Wide Boom Beyond One Company

This is not an isolated event. The data center build-out is proving to be a boon for the entire industrial sector. Fellow giant Honeywell (HON) also cited demand for data centers as a “bright spot” in its strong third-quarter earnings, specifically benefiting its building automation business. The market has taken notice of this broader trend. The Industrial Select Sector SPDR Fund (XLI) is up roughly 18% year-to-date, slightly outperforming the S&P 500’s 17% rise. This performance indicates a significant rotation of investor capital, acknowledging that the AI trade has expanded from high-tech chipmakers to the “picks and shovels” companies building the physical infrastructure.

Energy and Utilities Scramble to Meet “Endless” Demand

The core of this industrial boom is the “nearly endless” demand for power. Tech hyperscalers like Meta are increasingly developing on-site natural gas turbines rather than face multi-year queues for grid connections. This has breathed new life into the energy sector and placed immense pressure on utilities. NextEra Energy (NEE), one of the largest US electric power companies, cited AI as a “key demand line” in its third-quarter report. CEO John Ketchum emphasized that data center operators “need solutions for large load today and tomorrow,” underscoring the urgency and scale of the energy requirements.

Looking ahead, the symbiotic relationship between Big Tech and heavy industry is poised to deepen. Caterpillar’s CEO describes the current environment as merely the “early stages,” signaling a long-term growth pipeline as the company invests in new capacity. The market will be closely monitoring not just the hyperscalers’ AI advancements, but the capital expenditure and technological innovations of the industrial firms that power them, such as Caterpillar’s ventures into hydrogen fuel cells with Microsoft. This secondary AI play, focused on the physical infrastructure and power generation needed to run the digital revolution, is proving to be a robust and perhaps more durable investment thesis than the more volatile names that define the tech-heavy rally.