What is the industrials sector?
It includes aerospace and defense, building products, electrical equipment and machinery, as well as transportation, construction and engineering services.
The Industrials sector has been sensitive to fluctuations in the U.S.-China trade relationship this year. While some trade agreements have been reached (at least tentatively) between the United States and its trading partners—notably with China, Japan, South Korea, Canada and Mexico—continued world trade weakness may threaten the profitability of this globally oriented sector.
The Industrials sector has suffered from concerns about slowing global economic growth, with industrial output faltering as a manufacturing downturn has broadened globally. This has prompted business leaders around the world to put capital spending on hold, stalling revenue growth. However, we are beginning to see some stabilization in the global economy. And the industrial sector has advanced with the overall market.
Fundamentals remain sound, with corporate balance sheets relatively cash-rich. This should help push management teams to invest in new, more-efficient equipment to help offset weaker productivity. Also, relatively low manufacturing inventories signal the possibility of a demand-inspired rebuilding phase.
Barring a renewed retrenchment in global growth or a flair-up in geopolitical tensions, valuations may be one of the headwinds for the sector—with most of the metrics that we following reflecting poor rankings relative to the other sectors.
Overall, we are keeping our marketperform rating on the Industrials sector.
Sector Overview: Industrials is positive on Macro and Fundamentals, negative on Value
Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or anticipated tax legislation.
Source: Charles Schwab, as of 01/23/2020.
What do the ratings mean?
The sectors we analyze are from the widely recognized Global Industry Classification Standard (GICS®) groupings. After a review of risks and opportunities, we give each stock sector one of the following ratings:
- Outperform: likely to perform better than the broader stock market*
- Underperform: likely to perform worse than the broader stock market
- Marketperform: likely to track the broader stock market
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. Clients can log in to see our top-rated stocks in the Industrials sector.
* As represented by the S&P 500 index
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