Only a handful of primarily technology-focused companies are responsible for most of the S&P 500's year-to-date (YTD) gains. But that doesn't mean the technology industry will be the only winner in 2024.
In fact, the energy, materials, industrials, utilities, and financial sectors have all outperformed the S&P 500 over the past month. Meanwhile, the only sectors that have outperformed the S&P 500 year-to-date are communications, financials, energy, and industrials.
In a market where artificial intelligence (AI) is driving so many narratives, it can be refreshing to see legacy companies outperforming their benchmarks. Let's take a look at what is fueling the rise in the industrial sector and how to approach this sector.
Image source: Getty Images.
widespread gathering
The industrial sector includes a variety of industries, from parcel delivery companies such as United Parcel Service and FedEx, to defense contractors such as RTX and Lockheed Martin, to conglomerates such as Honeywell International. However, what is particularly interesting in this area is the strength of heavy equipment companies.
Below are the top 10 U.S.-based agricultural, heavy construction, and specialty industrial machinery companies by market capitalization. With the exception of Deere (which has still outperformed the S&P 500 over the past five years), all of these stocks are within 2% of their all-time highs.
GE data by YCharts.
Despite the gains, most of these stocks have modest price-to-earnings ratios (P/E) compared to the S&P 500's 28.4 P/E. This shows that much of the rise in stock prices is driven not only by valuation expansion, but also by profit growth.
GE PE Ratio data by YCharts.
spur the boom
Many heavy equipment companies sell to other companies rather than to consumers. Similarly, many technology companies sell to other companies, from Nvidia to Salesforce to cloud infrastructure providers such as Amazon Web Services and Microsoft Azure.
The market can be divided into seemingly endless categories. But one of the simplest designations is B2B-focused companies and consumer-focused companies.
A chasm is forming in the market where many B2B companies are doing well, while some (but not all) consumer-focused companies are struggling. The most recent examples are Nike and Lululemon, which suffered significant declines on March 22nd after disappointing earnings reports. Apple and Tesla are primarily focused on consumers, and many other big tech stocks are under pressure.
This means that industrial products are currently on the right side of the market, which is definitely helping the sector move higher.
A well-balanced company with room to manage
Many heavy equipment companies are in a cyclical business cycle, and while they are currently earning record profits, profits will eventually decline and valuations will look expensive. One of the benefits of investing in large industrial companies is the upside potential from growth, but also the stability from dividends and stock buybacks.
Illinois Tool Works (ITW 0.04%) is a great example of a company that provides shareholder value through dividends, share buybacks, and capital gains. Over the past 10 years, the company's stock price has outperformed the S&P 500, its dividend has increased by more than three times its value, and its share count has decreased by 27.6%. Illinois Tool Works is also a Dividend King with over 50 consecutive years of divine raises. The company has improved its margins and focused on profit growth rather than sales growth, a strategy that rewards shareholders.
Illinois Tool Works encapsulates the effectiveness of B2B strategies during challenging times of high interest rates. The prospect of lower interest rates could maintain momentum in the economic cycle. Wall Street wants future growth, and so does the industrial sector.
Investment in the industrial sector
There are many ways to invest in this sector other than acquiring shares in industry leaders.
The Industrial Select Sector SPDR Fund (XLI 0.02%) is one of the easiest ways to get baseline exposure to a sector without paying too many fees. This fund's expense ratio is just 0.09%, so an investor will pay just $9 in annual fees for every $10,000 he invests. With 78 holdings, no individual holdings greater than his 5% of the fund, and a market value of $17.7 billion, the fund is both diversified and large. One downside is that the yield is only 1.5%. This is mainly because the stock price is outpacing the dividend growth rate.
An alternative for investors looking for passive income is the iShares Global Infrastructure ETF (IGF -0.02%), which has a 3.5% yield and a P/E ratio of 21x, but a high expense ratio of 0.41%.
The fund includes a variety of industrial, energy and utility companies that contribute to the world's infrastructure. Many of the fund's international components have low valuations, making ETFs a good option for investors seeking higher yield and value.
legitimate extension
The industrial sector makes up 8.8% of the S&P 500, so it doesn't move as much as the tech sector. However, strong performance in industrial products is helping to lift the broader market.
This shows that non-tech companies that have little to do with hot trends like AI are raking in cash flow and delivering returns to shareholders. The cycle is changing and the sector could be depressed in the short term. But there's good reason to believe it will work out in the long run.
The sector has a path to sustainable profit growth and can reward shareholders with share buybacks and dividends even in a downturn.
Even with sectors like industrials hitting all-time highs, the stock market remains a great tool for compounding wealth over the long term.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool's board of directors. Daniel Felber has no position in any 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: January 2025 $47.50 long call on Nike, 2026 on Microsoft. January $395 calls and January 2026 $405 short calls to Microsoft. The Motley Fool has a disclosure policy.
