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Industrials Sector

Industrials Sector Rating: Marketperform

Industrials sector overview

Global manufacturing has improved, while U.S. manufacturing remains in expansionary territory. However, disappointment with the lack of U.S. fiscal stimulus could put a damper on the group.

Market outlook for the industrials sector

Global manufacturing is showing increasing signs of life, with recent purchasing managers index readings in most major countries moving into territory depicting expansion. Europe, especially, is showing signs of improvement as some of the uncertainty regarding elections within the bloc has been resolved and PMI readings have improved, while the European Central Bank announced a plan to begin to reduce their asset purchases. However, China has tightened monetary policy by issuing restrictive new housing regulations according to Reuters and raising a key interest rate, while President Xi, during the recent politburo, neglected to mention a target growth rate—indicating growth at all costs is not the policy of China going forward (Wall Street Journal, October 26, 2017).

In the U.S., the Institute for Supply Management's Manufacturing Index was quite strong in November, moving only modestly lower to 58.7 from 60.8 the month before, while the forward-looking new order component posted a robust 63.4 reading. Anything above 50 means an expansion in manufacturing activity. However, there were hopes at the beginning of the year that fiscal stimulus would be forthcoming and those hopes appear to be diminishing with the rancor in Washington, which has the potential to be a temporary weight on the group. But Strategas Research is reporting that defense spending has already ramped up at the fastest pace since 2011, while the recent escalation in geopolitical tensions could facilitate even greater military spending, both here and abroad.

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.
  • Accommodative monetary policy: Excluding the Federal Reserve, central banks throughout much of the developed world are maintaining 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. For now countries seem to be moving to scale them back.

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.

Consumer discretionary Consumer staples Energy
Financials Health care Industrials
Information technology Materials Real estate
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Health Care Sector Rating: Outperform
Information Technology Sector Rating: Outperform

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.

Performance may be affected by risks associated with non-diversification, including investments in specific sectors. Each individual investor should consider these risks carefully before investing in a particular security or strategy.

All expressions of opinion are subject to change without notice in reaction to shifting market and other 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.

Companies within the industrials sector may be significantly affected by economic fluctuations, government regulations and spending, commodity prices, import controls, global competition, depletion of resources, liability for environmental damage, consumer sentiment and spending, and other factors.

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.

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