While technology juggernauts have spearheaded most of the year-to-date profits for the S&P 500, other sectors are also making waves in 2024. Industries such as energy, materials, industrials, utilities, and finance are all outperforming the S&P 500 over the past month. Furthermore, communications, finance, energy, and industrials are the sole sectors surpassing the S&P 500 year-to-date.
Amidst an era dominated by the nuances of artificial intelligence, witnessing traditional corporations surpassing the benchmark serves as a refreshing anomaly. Let us dissect the industrial sector’s meteoric rise and discern the optimal approach to this flourishing sector.
Image source: Getty Images.
An Unprecedented Sector-Wide Surge
Within the industrial domain lie a myriad of segments ranging from package delivery giants like United Parcel Service and FedEx to defense titans such as RTX and Lockheed Martin, and conglomerates like Honeywell International. Notably, heavy-machinery firms appear to be the primary driving force behind this sector’s success.
The top 10 U.S.-based manufacturers of farm, heavy construction, and specialized industrial machinery, except for Deere (which continues to surpass the S&P 500 over the past five years), are all hovering within a 2% range of their all-time peak values.
GE data by YCharts.
Despite the remarkable upsurge, most of these companies boast price-to-earnings (P/E) ratios relatively modest compared to the S&P 500’s 28.4 P/E ratio. This signal suggests that the rally emanates from augmented earnings rather than merely inflated valuations.
GE PE Ratio data by YCharts.
Fueling the Momentum
Many heavy-machinery corporations cater primarily to other businesses, a similarity they share with various tech entities such as Nvidia, Salesforce, and cloud-computing giants like Amazon Web Services and Microsoft Azure.
The market delineates into two fundamental categories: business-to-business-centric entities versus consumer-focused ventures. A noticeable disparity is unfolding, with business-to-business firms thriving while select consumer-oriented enterprises, like Nike and Lululemon, endure significant declines post disappointing earnings reports on March 22.
In essence, the industrial domain finds itself on the advantageous side of the market’s current dynamics, significantly contributing to the sector’s ongoing rally.
Stable and Promising Investments
While many heavy-machinery firms may display cyclicality and witness peak earnings at present, a downward trajectory in earnings is inevitable, accompanied by potentially loftier valuations. Investing in leading industrial entities proffers dual benefits of prospective growth alongside the stability derived from dividends and share repurchases.
Illinois Tool Works (NYSE: ITW) serves as an illustrious exemplar, steadily enhancing shareholder value through dividends, buybacks, and capital appreciation. Over the past decade, the company has outperformed the S&P 500, tripling dividend payouts while reducing outstanding shares by 27.6%. Being a Dividend King with over 50 consecutive years of dividend hikes, Illinois Tool Works accentuates the efficacy of a business-to-business strategy during testing high-interest-rate environments. Potential easing of interest rates might sustain the sector’s momentum, amplifying the allure for prospective investors.
Besides direct investments in industry frontrunners, multiple avenues exist to engage with this burgeoning sector effectively.
The Industrial Select Sector SPDR fund (NYSEMKT: XLI) represents a straightforward method to gain exposure to the sector without incurring exorbitant fees. Boasting a meager expense ratio of 0.09%, investors dedicate merely $9 in yearly fees for every $10,000 invested. With 78 holdings and no constituent exceeding 5% of the fund, combined with a substantial $17.7 billion in market value, the fund ensures diversification alongside substantial size. One caveat is the modest 1.5% yield, primarily attributed to stock prices surpassing dividend growth rates.
Alternatively, for investors fixated on passive income, the iShares Global Infrastructure ETF (NASDAQ: IGF) proposes a 3.5% yield, a 21 P/E ratio, albeit with a higher expense ratio at 0.41%. This ETF encompasses an assortment of industrial, energy, and utility firms contributing to global infrastructure. A considerable number of the fund’s international holdings present lower valuations, rendering the ETF as an attractive option for investors seeking higher yields and value propositions.
A Validated Market Expansion
Accounting for 8.8% of the S&P 500, the industrial sector might not wield the influential capacity of the tech domain. Nevertheless, the robust performance displayed by industrials serves as an optimistic indicator for a comprehensive market upsurge.
This phenomenon accentuates that entities detached from contemporary trends like AI are also amassing substantial revenues, thereby benefiting their stakeholders. While short-term vicissitudes may transpire, the sector shows promising signs of sustained long-term prosperity, offering continuous revenue growth alongside shareholder gratification through buybacks and dividends.
Despite industrials attaining unprecedented heights, the stock market persists as an invaluable tool for wealth accumulation over prolonged periods.
Considering a $1,000 investment in Illinois Tool Works?
Before delving into Illinois Tool Works’ stocks, ponder over this:
The Motley Fool Stock Advisor analysts have pinpointed the 10 most lucrative stocks, projected to yield substantial returns; however, Illinois Tool Works doesn’t feature on this list. These top-performing stocks boast the potential for exponential gains in the imminent years.
The Stock Advisor furnishes investors with a user-friendly blueprint for success, encompassing guidance on portfolio construction, regular insights from analysts, and bi-monthly stock recommendations. Since 2002, the Stock Advisor service has phenomenally surpassed S&P 500’s returns by more than threefold*.
Explore the top 10 stocks
*Stock Advisor returns as of March 25, 2024
John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Apple, Emerson Electric, FedEx, Lululemon Athletica, Microsoft, Nike, Nvidia, Salesforce, and Tesla. The Motley Fool recommends Cummins, Deere & Company, Lockheed Martin, RTX, and United Parcel Service and recommends the following options: long January 2025 $47.50 calls on Nike, long January 2026 $395 calls on Microsoft, and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
The perspectives and views articulated herein solely represent the author’s viewpoints and do not necessarily mirror those of Nasdaq, Inc.
