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 largely remains positive but growth rates have slowed, as would be expected, with recent Purchasing Managers’ Index readings in most major countries staying in territory depicting expansion, but slipping from their highs. However, trade issues have continued between the U.S. and China, and 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, although the recent agreements between the European Union and the U.S. as well as China and the U.S. to at least temporarily freeze further tariff hikes and discuss freer trade and the USMCA agreement were positive developments.
In the U.S., the Institute for Supply Management's Manufacturing Index remained quite strong in its December release, rising to 59.3 reading, while the forward-looking new order component posted a strong, 62.1 reading, moving nicely higher despite concerns regarding the ongoing trade dispute with China. 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 this may be an area where agreements between the two parties are possible following the midterm elections—although we aren’t holding our breath!
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 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 continues, the possibility still exists 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.
|Communications||Consumer discretionary||Consumer staples||Energy|
|Information technology||Materials||Real estate|