Oil prices and yields surge alongside cooling AI expectations, U.S. industrial stocks drop nearly 10% and flash a technical red flag.

Over the past month, the sharp selloff in U.S. industrial stocks has been setting off alarm bells across Wall Street. The S&P 500 Industrials Index has fallen nearly 10% from its mid-August record high and closed below its 200-day moving average on September 14, the first time since the Trump trade war hit the sector in early 2025. The index, which includes manufacturing giants such as Caterpillar (CAT.US), GE Aerospace (GE.US), RTX (RTX.US) and Deere (DE.US), has since closed below that long-term momentum indicator every trading day. From a technical perspective, data from Bespoke Investment Group shows that the September 14 breakdown ended the index's record streak of 340 consecutive trading days closing above its 200-day moving average the longest since March 2018 and the sixth-longest since 1990. The end of that record marks a substantial breach of the long-term momentum structure, and Brian Mulberry, chief market strategist at Zacks Investment Management, noted that falling below the key moving average "is likely to exacerbate downward momentum in the short term." Signals from the flow of funds are equally unsettling. The Industrial Select Sector SPDR Fund (XLI.US), which tracks the industrial sector, is facing its second-largest monthly outflow since April 2025, second only to the initial outbreak of the Iran war in March this year. Behind the outflows is a steadily deteriorating macroeconomic environment. In recent weeks, tensions in the Middle East have persisted, and shipping through the Strait of Hormuz which carries about one-fifth of the world's oil and natural gas remains severely disrupted. On Thursday, Brent crude once again broke above $100 a barrel. At the same time, the 30-year U.S. Treasury yield hit a new high since 2004, while the 10-year Treasury yield reached its highest level since 2007. The simultaneous surge in oil prices and bond yields has created a double squeeze on the industrial sector: on one hand, crude oil has pushed diesel prices to record highs, directly raising fuel costs for transportation and manufacturing companies; on the other hand, rising interest rates have increased financing costs for capital-intensive manufacturers while threatening the overall economic demand that supports their sales. Brian Sponheimer, portfolio manager at Gabelli Funds, said: "This sets the stage for a pullback. If you're a trader, the path of least resistance right now is to hit the sell button." Against this backdrop, stocks such as FedEx Corporation (FDX.US), GE Aerospace and Stanley Agriculture Group (SWK.US) have all fallen by 10% or more. Cracks in the AI narrative: from growth engine to source of pressure One of the industrial sector's previous major drivers of gains came from expectations that the rapid buildout of AI data centers would boost demand for industrial equipment. Technology companies are investing hundreds of billions of dollars in data center construction, generating strong demand for power generation units, electrical equipment and engineering machinery. However, this logic has come under severe strain in recent months. In mid-September, Anthropic CEO Dario Amodei's proposal to slow the pace of frontier AI model development triggered a broad selloff in AI infrastructure stocks. GE Vernova (GEV.US) plunged nearly 9% that day, Caterpillar fell more than 4%, and Vertiv (VRT.US) dropped nearly 8%. Debate on Wall Street over what stage the AI capital expenditure cycle is in has also been fluctuating. William Blair noted in a September 11 research report that investors' bigger concern is that "we may already be in the late stage of the capex cycle, where returns are starting to disappoint and excess capacity is beginning to build up." Meanwhile, growing public resistance to data center construction is adding to selling pressure. Mark Hackett of Nationwide pointed out that this resistance, combined with uncertainty over capex expectations, has hit power equipment and engineering machinery stocks hardest. Matt Maley, chief market strategist at Miller Tabak, warned that industrial giants such as Caterpillar have long been regarded as barometers for the broader market, and that this importance has been further reinforced as they become deeply tied to the AI supply chain. "If the weakness in this sector persists, it should raise broad alarm among investors," Maley said. Deere bucks the trend: agricultural recovery logic independent of the industrial selloff Against the backdrop of overall pressure on the industrial index, Deere has become one of the few components to rise against the trend, gaining 17% cumulatively during the index pullback. Deere's strong performance is closely tied to the rebound in Shenzhen Agricultural Power Group prices. Corn futures last week hit their highest level in more than three years, up nearly 22% year to date, mainly driven by expectations of tighter supply; soybean futures also rose 22%. Baird analyst Mircea Dobre upgraded Deere from "Neutral" to "Outperform" and sharply raised his target price from $640 to $800. He wrote in a research note: "Mid-2027 corn futures prices are already above farmers' break-even point, and the soybean outlook has also improved; deteriorating crop conditions and the 2026/27 stock-to-use ratio both point to sustainable price momentum and rising farmer profit per acre, which is highly correlated with future equipment demand." Dobre believes Deere "offers the clearest investment case because of its high exposure to North American row crop equipment demand when investors look for a turning point in agricultural fundamentals, this is the 'first stock to buy.'" Deere shares have risen more than 53% year to date in 2026 and are on track for their seventh annual gain in eight years, as well as their best annual performance since a 55% surge in 2020. Still, 12 of the 26 analysts covering the stock maintain a "Hold" rating, reflecting disagreement over its upside potential. Although the technical and macroeconomic signals are hardly encouraging, multiple indicators show that the industrial sector has entered oversold territory. Adam Turnquist, chief technical strategist at LPL Financial, is closely watching the key level of 1,415 points. He noted that a break below that threshold "could open the door to a decline toward 1,320 points," where the index had previously found support. The index closed at about 1,440 points on Wednesday. But Turnquist also stressed that analysts' earnings growth expectations for the industrial sector remain strong and that the index is already oversold. He wrote in a research note: "This magnitude of selling pressure points to a 'washout' condition, which historically has often signaled at least a short-term bounce."