Hopping on the next market trend is easier said than done. However, there is one simple and logical way to find the next winning sector in the market. By tracking exchange-traded fund (ETF) activity, you can spot the shifting money tides before the opportunity has passed you by.
Because the United States economy is setting up to pivot this year, thanks to the Federal Reserve (the Fed), industrial stocks are starting to attract an influx of buyers. You can see this in real-time by keeping track of the Industrial Select Sector SPDR Fund (NYSEARCA: XLI) which is up 26.6% over the past twelve months. But that's not all.
Zooming into the one-month mark, this ETF has outperformed the broader S&P 500 by as much as 2%. Leading the way in this ETF are three top holdings, which include names like General Electric (NYSE: GE), Caterpillar Inc. (NYSE: CAT), and even Uber Technologies Inc. (NYSE: UBER). Each of these has its own story pushing for a bullish case.
Industrials Are the Place to Be
Inside their 2024 macro outlook report, analysts at The Goldman Sachs Group Inc. (NYSE: GS) expressed their bullish view on the manufacturing sector of the U.S. economy. You should understand their clear reasoning before making your stock selection.
The Fed is looking to cut interest rates this year, though the timing and size of these cuts are still in question. You can use the FedWatch tool offered by CME Group Inc. (NASDAQ: CME) to get a feel for when traders expect these cuts to occur. Currently, expectations are for a cut around the Fed's June 2024 meeting.
Interest rate cuts will weaken the dollar, making it cheaper against international currencies like the Euro or Yen. As a result, American exports become more attractive as these foreign nations can buy more of them with less of their currency.
This could be why the February data for the ISM manufacturing PMI index pushed a 6.4% jump in export orders. That's a level that investors haven't seen in the past two years. The writing is on the wall, and industrial companies must be on their toes to answer the production demand these new orders bring.
At the Top for a Reason
The top three holdings in the industrials ETF are the companies mentioned earlier. Still, there must be a reason (other than a stellar performance) why they made it to the top of the list. Although they operate in different industries, they are all connected by the same trend.
General Electric operates in the renewable energy space, manufacturing and creating the infrastructure needed for this industrial revolution. Oil prices are set to rise as lower interest rates will increase demand for domestic manufacturing products and the need to export them overseas.
Specifically, Goldman expects to see prices per barrel as high as $100 this year. More expensive oil and fuel make renewable energy a more attractive proposition, which is why analysts at the Jefferies Financial Group Inc. (NYSE: JEF) boosted their price targets on the stock up to $195 a share, calling for a 12% upside.
The double-digit upside for a $190 billion market capitalization behemoth is not peanuts. Earnings per share (EPS) are also projected to jump by 29% in the next 12 months, all aboard.
More expensive oil also means more expensive food and transportation costs. This is where Uber comes into play. Now that manufacturing employees will likely work overtime to fill demanding orders, getting to and from job sites can be made easier with Uber.
Analysts at the UBS Group (NYSE: UBS) expect 68% EPS growth this year and see a valuation of up to $96 a share. UBER stock would have to rally by 23% to prove these targets right, and a recent $7 billion buyback announcement does the trick.
Last but not least, Caterpillar comes in to enable the expansion of new manufacturing sites so these industrial names can do their thing. There is also a pending boom in residential construction in the U.S. After the National Association of Realtors (NAR) decided to cut agent commissions, you bet housing demand will break out.
Riding on multiple tailwinds needed in the U.S. economy, Caterpillar analysts at Truist Financial Co. (NYSE: TFC) see a price target of up to $390 set in March. This one is higher than the February price target set by J.P. Morgan Chase & Co. (NYSE: JPM) of $385.
Both saw a respective upside of 11% and 10%, and Fisher Asset Management is justified in upping its position in the stock by 2.2% as of March. This transaction is an approximate $53 million purchase.
