What is the industrials sector?
It includes aerospace and defense, building products, electrical equipment and machinery, as well as transportation, construction and engineering services.
The Industrials sector has suffered significantly from the global economic recession, with industrial output faltering as a manufacturing downturn has broadened globally. While defense spending is likely safe, the sharp retrenchment in the economy and travel has weighed on airlines and the transportation industry in general. Together, this has prompted business leaders around the world to put nearly all capital spending on hold, stalling revenue growth.
There are now improving prospects for economic growth, and the markets have begun to trade as would be typically seen in an early stage of the business cycle. While the path of the economy remains highly uncertain, this provides a nice macroeconomic tailwind for the sector. And despite ongoing woes, the strong rebound in airline industry—which had been decimated earlier this year—has helped underpin the sector recently.
Valuations remain poor, as 2020 earnings expectations had been slashed by more than 50% in recent months. The fundamentals for the sector have improved—despite uncertainty surrounding global growth —as companies entered the crisis in a strong position and earnings revisions have turned higher. Once an enduring economic recovery emerges, low manufacturing inventories and investment in more-efficient equipment to help offset weaker productivity is likely. Additionally, the sector has historically had higher-than-average sensitivity to the overall market—which could be a tailwind if the rally continues and the leadership of the market broadens. Long-term momentum has moved up to be in the middle of the sector pack.
Overall, we are keeping our marketperform rating on the Industrials sector.
Sector Overview: Industrials
Note: Each of the sector lenses shown above—Macroeconomic, Value, Fundamental and Relative Strength—is both intuitive and evidenced-based in nature. Within each, there are a varying number of factors. The Macroeconomic lens includes sector sensitivities to interest rates, stocks and the value of the U.S. dollar; the outlook for each of these is determined by the Schwab Center for Financial Research (SCFR)’s Asset Allocation Working Group, which uses a mosaic approach of quantitative and qualitative considerations. Value includes six different valuation metrics that provide a holistic perspective on current valuations relative to each of the sectors’ own historical valuations, as well as relative to the other sectors. Fundamental provides insight as to how efficiently the companies within each sector use invested capital to produce earnings; this historically has been informative as to future relative performance of the sectors. Finally, Relative Strength measures momentum of the individual sectors against all of the other sectors. We also consider the data in the context of factors outside the scope of these indicators—for example, geopolitical risk or central bank policy changes.
Source: Charles Schwab, as of 09/10/2020
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
- Marketperform: likely to track the broader stock market
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.
* As represented by the S&P 500 index
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