Forget Big Tech—Why Industrial Stocks Are Booming This Year

Key Takeaways

• Industrials stocks have outperformed all other sectors and the broader stock market so far in 2025.
• The aerospace and defense industry has been the biggest driver of gains, while farm and heavy machinery stocks and industrial products and distribution firms have also contributed.
• Airlines, integrated freight and logistics, trucking, and staffing and employment services have lagged in 2025, largely due to concerns over a slowing economy.
• Morningstar sees industrials as 10% overvalued, but individual names remain undervalued.

While much of the attention has been on the revival of the big tech stock rally in 2025, an often-overlooked group of stocks has charged into the lead: industrials. After two straight years of lagging the market, these stocks are outperforming.

The Morningstar US Industrials Index is up 15.7% in the year to date, taking first place among the 11 Morningstar US sector indexes, nudging ahead of a powerful rally in utilities and outpacing the market’s usual recent powerhouses, technology and communications services. Meanwhile, the overall stock market, as measured by the Morningstar US Market Index, is up 9.2% in the year to date.

Morningstar director of equity research Brian Bernard points to a number of factors fueling the rally. “The aerospace and defense industry, which represents roughly one-quarter of the US Industrials Index, has been a key source of outperformance,” he says. Not only that, but he says farm and heavy machinery stocks have risen on growing investor confidence in an agriculture rebound and the promise of precision agriculture technology. At the same time, industrial products and distribution firms have benefited from economic resilience, reshoring optimism, and AI-driven data center demand.

The sector’s strong performance marks a shift from recent years. Industrials lagged the broader market in four of the past five years and often ranked mid-pack among the 11 sectors, as technology and the AI investment wave dominated returns.

Since bottoming out on April 8 because of the tariff-induced market plunge, the industrials sector has surged 34.9%, second only to technology, which has jumped 46.6%. The broader stock market has gained 29.1%.

However, many investors may not have noticed the impact of the industrials rally in their portfolios. Of the 9.2 percentage points gained by the stock market in 2025, technology led the way with a 4.0-point contribution. Meanwhile, 1.4 points came from industrials, ranking them third. The difference is that tech is nearly one-third of the US Market Index, while industrials account for just 8.6%. Financial services, with a 13.8% weight, ranked second with a 1.6-point contribution.

What’s Driving the Rally in Industrials?

The aerospace and defense industry was the biggest driver of returns, contributing nearly half of the percentage points gained by the Industrials Index and adding 0.6 points to the return on the broader US Market Index.

“We have a bullish outlook for commercial aviation. We project a near doubling of the global fleet by 2042 through secular growth and replacement of older, less efficient aircraft,” says Bernard. “Global demand for defense equipment has been robust and recent conflicts in the Middle East likely bolstered investor expectations for the defense industry.”

Farm and heavy machinery companies have also been among the top contributors this year. “We believe investors have become more confident that agriculture markets have bottomed and are poised to rebound,” Bernard says. “Indeed, according to the Purdue University Ag Economy Barometer, farmer confidence has greatly improved in 2025. In addition, the advent of ‘precision agriculture’ technology is beginning to bolster industry growth and profit margins.”

Industrial products and distribution firms round out the three most notable contributors by industry. “We think that’s a testament to US economic resiliency and optimism that trade agreements will lead to more US manufacturing and supply chain reshoring, and the OBBBA will result in greater investments in capex and R&D due to favorable tax treatment,” Bernard says. “Furthermore, firms with data center exposure have tended to outperform amid optimism surrounding the huge market opportunity for AI.”

Laggards Among Industrials

On the flip side, airlines, integrated freight and logistics, trucking, and staffing and employment services have lagged in 2025, with all four sectors detracting from the market return.

The airline industry has suffered due to worries surrounding the health of the economy and a potential recession sparked by tariffs, according to Morningstar equity analyst Nicolas Owens. “Even though the tariffs have been delayed and they don’t affect airlines directly, concern about the overall economy and consumer sentiment has weighed on airline valuations. I’d also say these worries are somewhat justified in the case of airlines, as their results are historically quite sensitive to consumer spending habits.”

Logistics and trucking firms are also sensitive to consumer spending, so, like the airline industry, recession fears have played a large part in their underperformance, according to Morningstar senior equity analyst Matthew Young. “The risk of economic fallout from tariffs remains, even if the magnitude of that threat has eased,” he says.

Best and Worst Performers Among Industrials

Of the 113 US-listed industrials stocks covered by Morningstar analysts, 81 have positive returns in 2025. GE Vernova GEV was the best performer, returning 97.1%. Following its earnings report in mid-July, Morningstar equity analyst Brett Castelli bumped up GE Vernova’s fair value estimate due to higher long-term revenue and margin expectations within its power and electrification segments. “GE Vernova remains well-positioned to capitalize on growing electricity demand, but we think its current valuation adequately reflects future revenue growth and margin expansion,” Castelli wrote. “We view shares as overvalued following the sharp rally in recent months.”

The next three best performers all fall into the aerospace and defense industry: Rolls-Royce RYCEY (up 87.0%), BAE Systems BAESY (up 71.3%), and GE Aerospace GE (up 62.7%). Bloom Energy BE rounds out the top five with a 56.6% gain.

The worst-performing industrials stock under our coverage is American Airlines AAL, which is down 33.6% this year. “Amid stiff competition from United UAL and Delta DAL, American faces slower top-line growth than it anticipated in 2025, while its unit costs inexorably rise because of increased labor costs. Simple math dictates that profits will be lower as a result,” Owens wrote following the company’s earnings call in July.

Trucking company Saia SAIA comes in second with a 29.1% decline. Global Payments GPN (down 24.0%), Herc HRI (down 20.1%), and Copart CPRT (down 19.7%), round out the bottom five.

Industrials Sector Valuation and Outlook

Industrials started the year 5% overvalued, based on the 98 stocks covered by Morningstar analysts out of the 200 in the US Industrials Index. After the rally, the sector appears 10% overvalued, while the broader US stock market appears 4% overvalued.

“Considering valuations, investors should take a cautious approach to the sector,” says Bernard. A slowing global economy is the key risk, but each industry has its own sources of uncertainty.

• Aerospace and defense: “Supply chain snarls and/or execution issues can trickle through the entire aircraft manufacturing value stream, increasing lead times. Additionally, defense contractors are subject to the vagaries of global defense budgets.”
• Business services: “Non-essential services may be deferred during economic downturn, and automation could shrink the addressable market for workforce-related services.”
• Construction: “New construction spending is highly cyclical, and fixed-price contracts can result in unmitigated cost overruns.”
• Farm and construction machinery: “Ag equipment demand is correlated with crop prices, and new construction spending is highly cyclical.”
• Industrial products and distribution: Demand for industrial products is sensitive to the business cycle. Additionally, continual research and development investment is needed to stay ahead of technological advances and changing regulatory requirements.”
• Transportation: “Volume and pricing are subject to variability in US industrial production and real goods consumption.”
• Waste management: “Regulatory changes related to landfill operations and greater public adoption of landfill alternatives could lower industry profitability.”

Despite the elevated valuations, Bernard says there are still investment opportunities that are more idiosyncratic in nature. “For example, the second-largest manufacturer of farming equipment, CNH Industrial CNH, has lagged leader Deere DE and gone through restructuring and leadership changes. We believe CNH offers a comparable portfolio of products with a dealer network and finance subsidiary all at scale. While it lags Deere, the rising tide of precision agriculture will inevitably lift all ships.”

See the table below for a full list of undervalued industrials stocks covered by Morningstar analysts.