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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 somewhat. 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 is hovering just above the 50 mark that denotes expansion from contraction. However, in the U.S., the Institute for Supply Management® (ISM®) Manufacturing survey increased our concern a bit by falling again to 52.1 in May. However, the forward-looking new order component did manage to tick a bit higher, moving to 52.7 from 51.7, but manufacturers appear to be getting antsy 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:

  • More aggressive 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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Important Disclosures

Schwab Sector Views do not represent a personalized recommendation of a particular investment strategy to you. You should not buy or sell an investment without first considering whether it is appropriate for you and your portfolio. Additionally, you should review and consider any recent market news. Supporting documentation for any claims or statistical information is available upon request.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Diversification strategies do not ensure a profit and do not protect against losses in declining markets.

Indexes are unmanaged, do not incur management fees, costs and expenses, and cannot be invested in directly. Past performance is no guarantee of future results.

The S&P 500 Index is a market-capitalization-weighted index comprising 500 widely traded stocks chosen for market size, liquidity and industry group representation.

The Global Industry Classification Standard (GICS) was developed by and is the exclusive property of Morgan Stanley Capital International Inc. (MSCI) and Standard & Poor's. GICS is a service mark of MSCI and S&P and has been licensed for use by Charles Schwab & Co., Inc.

Markit Manufacturing Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index includes the major indicators of: new orders, inventory levels, production, supplier deliveries and the employment environment.

The Institute for Supply Management (ISM) Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries.

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