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Industrials Sector

Industrials Sector Rating: Marketperform

Industrials sector overview

Global manufacturing improvement appears to have leveled off, while U.S. manufacturing remains in expansionary territory. However, concerns about a trade war could put a damper on the group, although the tax cuts should help to dampen that potential disappointment.

Market outlook for the industrials sector

Global manufacturing has shown improvement although the rate of improvement, as would be expected, appears to be flattening out, with recent Purchasing Managers’ Index readings in most major countries staying in territory depicting expansion. Europe has slipped modestly but remains in positive territory. However, trade issues have flared up concerns about a trade war that could threaten the profitability of this very globally oriented sector, with 45% of the sector’s revenue coming from foreign sources, according to Strategas Research. We continue to be encouraged that all sides are continuing to negotiate, but don’t completely discount the possibility of an escalating trade war, and the escalating rhetoric has dented performance of the sector recently.

In the U.S., the Institute for Supply Management's Manufacturing Index remained quite strong in its June release, coming in at a solid 58.7, while the forward-looking new order component posted a robust 63.7 reading. Anything above 50 means an expansion in manufacturing activity. However, there were hopes at the beginning of last 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 the recent budget agreement raised the U.S. military budget to $700 billion for 2018—a record high, according to the Wall Street Journal.

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:

  • 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.
  • More aggressive Fed action: Should inflation start to reach concerning levels, the central bank could raise rates more aggressively, which would likely dent industrial shares.
  • Trade concerns:  As trade dispute rhetoric ramps up, concerns are growing that a damaging trade dispute could ensue.

 

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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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.

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.

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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