Industrials Sector Rating: Marketperform
Industrials sector overview
Global manufacturing activity has deteriorated, while U.S. manufacturing remains in expansionary territory, although some measures also have fallen. Additionally, concerns about trade disputes could put a damper on the group.
Market outlook for the industrials sector
The industrials sector has struggled over the past month as trade issues have escalated between the U.S. and China, and that could threaten the profitability of this very globally oriented sector (45% of the sector’s revenue comes from foreign sources, according to Strategas Research). While the China situation has appeared to deteriorate, potential tariffs on EU and Japanese autos were put off for up to 180 days, while getting the USMCA through Congress is showing some positive signs for the first time in a while (Strategas).
Additional pressure appears to be coming from global growth concerns, as the Chinese Markit PMI fell just below the 50 mark that marks the dividing line between expansion and contraction. However, in the U.S., the Institute for Supply Management® (ISM®) Manufacturing survey increased our concern a bit by falling again to 51.2 in July, while the forward-looking new order recovered a touch, moving to 50.8 from 50.0, as manufacturers appear be growing more concerned regarding the ongoing China-U.S. trade dispute. There were hopes at the beginning of last year that fiscal stimulus would be forthcoming, and there were reports (Reuters) that the president and Democratic leadership “agreed” to a $2 trillion infrastructure agreement. Stocks in this group reacted very little to this announcement, indicating to us skepticism among companies as funding issues were left unanswered.
Overall, we have concerns but they're somewhat balanced out, which results in our relatively neutral view.
Factors that may affect the industrials sector
Positive factors for the industrials sector include:
- Potential productivity gains: Corporate balance sheets remain relatively cash-rich, which should help push management teams to invest in new, more-efficient equipment to help offset weaker productivity.
- Room for growth: Relatively low manufacturing inventories signal the possibility of a demand-inspired rebuilding phase.
Negative factors for industrials include:
- Reversal of recent Federal Reserve action: Should inflation start to reach concerning levels, the central bank could reverse course and be forced to reinstate rate hikes, which would likely dent industrial shares.
- Trade concerns: As trade dispute rhetoric continues, the possibility still exists that a damaging trade dispute could ensue.
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