With the recent economic growth, stocks have been trading in ways typical of the expansion stages of the business cycle—which can be positive for the historically cyclical Industrials sector. Additionally, prospects for an increase in infrastructure and clean-energy investment likely will support the machinery and building materials industries.
Although transportation and air freight have benefited from a return in demand as economies reopen, higher fuel costs and supply backlogs may pressure profits at a time when valuations for the sector are relatively unattractive. The aerospace and defense industry continues to face significant headwinds amid expected low airliner demand, production issues, and uncertainty surrounding the political appetite for defense spending. Additionally, if inflation becomes embedded and the Federal Reserve aggressively tightens monetary policy—which could slow economic growth—it would create an environment in which the sector historically has struggled.
Positives for the sector:
- Capital expenditures are likely to increase if global growth continues to improve
- The sector tends to outperform in the expansion phases of the business cycle
- Many companies have solid fundamentals amid rising earnings expectations
- Strong global trade and increase in online shopping are spurring demand for transportation
Negatives for the sector:
- Aircraft demand is picking up, but supply issues persist
- Valuations are relatively unattractive
- Higher fuel costs are a headwind for the transportation and air freight industries.
Risks for the sector:
- While we’re currently neutral on the sector, if there is a stronger-than-expected surge in global growth or massive infrastructure stimulus, Industrials could perform better than expected
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*
- Neutral: no current view on likely relative performance
* As represented by the S&P 500 index
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.
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