Industrials Sector Rating: Marketperform

What is the industrials sector?

The industrials sector includes manufacturers and distributors of capital goods such as aerospace and defense, building products, electrical equipment and machinery. It also includes providers of services including transportation, construction, engineering and printing.

Industrials sector overview

Global manufacturing has begun to improve, although unevenly, while U.S. manufacturing remains in expansionary territory. However, a stronger U.S. dollar and a tepid European economy are potential risks to U.S. industrials companies.

Market outlook for the industrials sector

Global manufacturing has started to show some signs of life, with recent purchasing managers index readings in some countries moving out of contractionary territory. China is aggressively responding to slowing growth by loosening monetary policy, which should at least temporarily boost manufacturing. However, the European economy is now under greater uncertainty from increased rhetoric around various potential political developments as multiple elections are on the horizon. Despite the European Central Bank's accommodative monetary policy and apparent readiness to provide more aid if needed, and some governments' shift away from the more onerous austerity policies, the effectiveness of these measures appears to be limited.

Global manufacturing has started to show some signs of life, with recent purchasing managers index readings in some countries moving out of contractionary territory. However, China is now easing off some of their stimulus policies and recently raised a key interest rate, while the European economy is now under greater uncertainty from increased rhetoric around various potential political developments as multiple elections are on the horizon. Despite the European Central Bank's accommodative monetary policy and apparent readiness to provide more aid if needed, and some governments' shift away from the more onerous austerity policies, the effectiveness of these measures appears to be limited.

In the U.S., encouragingly, the Institute for Supply Management's Manufacturing Index rose again in February, moving to 57.7 from the previous reading of 56.0. Anything above 50 means an expansion in manufacturing activity. However, dollar strength could weigh on exports and eventually on production and earnings. That said, when the dollar strengthens because the U.S.’s growth prospects are improving, as appears to be the case now, we think the hit to the industrial sector could be mitigated somewhat and we’ve seen dollar gains moderate recently, which should help the group internationally.

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. 
     
  • Accommodative monetary policy: Excluding the Federal Reserve, central banks throughout much of the developed world are implementing more accommodative policies aimed at stimulating economic activity. Additionally, on the fiscal side, countries are considering undoing some of their more stringent austerity-related policies, which could help to boost economic activity and demand for industrial goods. 

Negative factors for industrials include:

  • Limited access to credit: This is especially the case among smaller businesses, and tends to dampen spending plans.
     
  • Fiscal austerity: We continue to watch fiscal austerity measures around the world, which could dampen growth in the industrials sector, but for now countries seem to be moving to scale them back.
     
  • Stronger dollar: A continued strengthening of the U.S. dollar could hurt exports and dent U.S. industrial company profitability.

Clients can see our top-rated stocks in the industrials sector.

Want to learn more about a specific sector? Click on a link below for more information or visit Schwab Sector Views to see how they compare.

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