Industrial stocks are set to outperform the market this year after a dismal 2018, as FactSet data indicates the sector could experience high-octane earnings growth double that of the S&P 500. Up 16% already this year, higher earnings growth could provide a further boost to industrial stocks like General Electric Co. (GE), Masco Corp. (MAS), TransDigm Group Inc. (TDG), Dover Corp. (DOV), Jacobs Engineering Group Inc. (JEC), Roper Technologies Inc. (ROP), Quanta Services Inc. (PWR) and Fortive Corp. (FTV).
“Industrials are at least showing above-average growth,” John Davi, CIO at Astoria Portfolio Advisors, told CNBC. “We’re living in a world where growth is declining. S&P 500 earnings are de-accelerating, so if you can get stocks that have above-average growth to the S&P, then that’s really attractive.”
8 Industrial High-Fliers
- General Electric: +40%
- Masco: +34%
- TransDigm: +33%
- Dover: +30%
- Jacobs Engineering: +28%
- Roper: +25%
- Quanta Services: +25%
- Fortive: +24%
Source: CNN Money, YTD performance as of 4pm EST 03/21.
What It Means for Investors
Coming off a 15% decline that marked their worst performance since the financial crisis, industrial stocks should get a major boost from earnings growth. The FactSet data reveals expectations that earnings growth for industrials will be the highest among all S&P 500 sectors in 2019 at 8.4%. For the broad market index as a whole, earnings growth is expected to increase just 3.8%.
Investors will still have to be picky about which industrial stocks will outperform, as illustrated by General Electric. The stock is up 40% this year, well above the 16% experienced by the sector as whole, which means there are at least some industrial stocks bringing down that average. The leadership of new CEO Larry Culp and his commitment to transparency in the company’s efforts to turn things around is helping to give the stock a boost. Plunging more than 56% last year also may have convinced investors that the stock may have bottomed out.
The sector also still faces major risks. One of the major concerns is that global economic growth is slowing. Uncertainty surrounding the U.S. China trade deal is not helping matters, and industrial-production data is already showing signs of weakness. “We remain skeptical about the ability of industrial stocks to sustainably outperform amid the ongoing sluggish global growth environment and recent weaker readings in leading indicators of U.S. factory activity,” wrote Salvatore Ruscitti, U.S. equity strategist at MRB Partners.
Considering the hurdles, the next year is unlikely to be a smooth ride upward for industrial stocks. But with expectations that earnings growth will be stronger than any other sector, industrials should at least be able to outperform the market benchmark.