The United States is on the brink of a significant industrial surge, driven in part by a $2 trillion investment from new federal initiatives focused on infrastructure and the development of electric vehicles.
The Institute for Supply Management’s Purchasing Manager Index (PMI) is an indicator of the health of the U.S. manufacturing economy. This index has shown a decline for seven consecutive months, which is noteworthy given that the longest decline in the past two decades was an 11-month period starting in September 2008 during the financial crisis. There is anticipation for the next PMI reading on July 3, which is expected to reflect a slight improvement.
The manufacturing sector might be seeing the end of its downturn, suggesting a potential upturn. This outlook led Thomas Lee, managing partner at Fundstrat, to advocate for increased investment in manufacturing back in May, a stance he recently reaffirmed due to encouraging data on existing-home sales and building permits.
Investors are now considering how to capitalize on this shift. A key strategy is to align with federal government trends, particularly in areas related to the return of manufacturing to U.S. soil, infrastructure investment, and the broader impact of electric vehicles and renewable energy. These sectors are being propelled by the $1.2 trillion Infrastructure Investment and Jobs Act and the $500 billion Inflation Reduction Act.
Companies like United Rentals (URI), Deere (DE), Eaton (ETN), Schneider Electric (SBGSY), Quanta Services (PWR), and Johnson Controls International (JCI) are seen as prime candidates. These firms are involved in construction equipment supply, electrical infrastructure development, and home heating and cooling electrification.
Analyst sentiment for these companies is strong, with about 70% recommending a Buy, surpassing the S&P 500’s average. Expectations are for these companies to increase their earnings in the coming years, with a positive revision in their 2024 earnings forecasts.
On average, these stocks are trading at about 17 times their estimated 2024 earnings, slightly lower than the S&P 500 average. However, there is a significant range within this group, from United Rentals at around nine times earnings to Quanta at about 23 times.
Given this analysis, these companies are considered a good starting point for investment as the market conditions continue to evolve.
