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 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 reflected trade concerns by falling to 54.1 from 59.3, while the forward-looking new order component dropped sharply to 51.1, as manufacturers appear to be pulling in the reins a bit as they await a resolution to the China-U.S. trade dispute. 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, exacerbated by the extended partial government shutdown, 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:
  • 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.

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