Trump's Sledgehammer Policies Have Ignited Wall Street's Hottest Trade—And It's Not AI

President Donald Trump‘s America First agenda has supercharged investor flows and returns in a sector quietly dominating Wall Street in 2025—and it's not artificial intelligence or the Magnificent Seven.

Industrial stocks are stealing the show. Through July 22, the Industrial Select Sector SPDR Fund (NYSE:XLI) is up 15% year to date, nearly doubling the S&P 500's 8% return and even edging past the red-hot tech sector—a rare feat.

Excluding 2022, industrials had underperformed tech in six of the last seven years. But this year, it's different. And the catalyst might be more political than technical.

Why Defense Stocks Are Exploding

The spark came from Capitol Hill. On July 4, Trump signed the so-called "One Big Beautiful Bill Act," a sweeping $156.2 billion boost to defense spending—the most significant one-year increase in over a decade—at the expense of Medicaid and food assistance programs.

That flood of Pentagon cash has ignited shares of defense companies, making them the biggest force behind industrial sector outperformance.

The iShares U.S. Aerospace & Defense ETF (NYSE:ITA) has surged 33% so far in 2025, on pace for its best year since 2017.

Top industrial names like Howmet Aerospace Inc. (NASDAQ:HWM) and GE Vernova Inc. (NYSE:GEV) have more than doubled the S&P 500's return this year. General Electric Co. (NYSE:GE), Uber Technologies Inc. (NYSE:UBER) and Huntington Ingalls Industries Inc. (NYSE:HII) have all logged gains north of 35%.

Here’s how the year-to-date top industrial performers look:

Investors Are Flooding In

According to a note by Bank of America strategist Jill Carey Hall, industrial stocks have become a magnet for new capital.

"Rolling two-week inflows into Industrials were the second largest in our data history—only topped in March 2015—and are now in the 97th percentile when adjusted for sector size," Hall wrote Tuesday.

Financials also saw solid flows, but the momentum is clearly with industrials. The trade war may have sparked fear in 2024, but 2025 is becoming a banner year for companies tied to manufacturing, logistics and defense.

Skeptics Warn This Boom May Fade

Despite the rally, not everyone is convinced the industrial renaissance will last.

Oxford Economics economist Nico Palesch said the idea of a manufacturing "resurgence" driven by Trump's tariffs is more myth than material shift.

"We do not see broad-based reindustrialization on the horizon," Palesch said. His team expects U.S. industrial production to grow just 0.9% in 2025 and shrink by 0.8% in 2026—well below the pre-election forecasts.

Among the headwinds cited: higher costs for materials and machinery due to tariffs, uncertainty deterring investment, and stricter immigration policies exacerbating labor shortages in the industrial sector.

Still, some of Trump's policies—such as immediate expensing of factory investments and a weaker dollar—could help mitigate the downside.

Bottom Line: A Politically Supercharged Trade

Industrials may not be as hyped as AI, but they've become 2025's stealth outperformers.

Fueled by defense spending, tariff reshuffling, and a surge of investor inflows, the sector is booming—and it has the Trump administration's fingerprints all over it.

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