Ever since the pandemic hit markets across the globe, it has been all about the tech rally. The technology sector gets about a one-fifth share of the S&P 500. The coronavirus outbreak could not take the sheen out of this sector, rather added more to it. Social-distancing norms imposed globally to mitigate the spread of the virus compelled people to stay indoors, binge on online shopping, and work as well as learn from home (read: Top Sector of 1H & Its Top ETFs).
Though the sector is still rallying, many are worried about the longevity of this momentum as well as the overvaluation concerns. Meanwhile, the pandemic situation has been constantly changing and hopes for vaccines have been rising, leading several laggards of the pandemic to become the leaders.
Investors should note that S&P 500’s industrials segment (which takes about 9.7% of the total market cap) has rallied more than the information technology in the past month. The Industrial Select Sector SPDR ETF (NYSE:XLI) XLI has been up 13.6% in the past month compared with the about 6% gains in the Technology Select Sector SPDR ETF (NYSE:XLK) XLK as well as the S&P 500.
In the past three months also, Industrial Products has appreciated 32.1% compared with the 18.3% gains in the S&P 500 ETF IVV. Let’s take a look at what is driving the sector’s rally.
Compelling Valuation?
According to Michael Bapis, managing director of Vios Advisors at Rockefeller Capital Management, it is probably the beginning of a sector rotation from high-flying growth names to safe-haven names, as quoted on CNBC.
Notably, even after the recent rally, Industrials boasts a compelling valuation of 23.19X forward P/E versus 22.17X P/E of IVV. The debt-equity ratio of this capital-intensive sector stands at 0.45X versus 0.77X of IVV. The current ratio of the Industrial sector is 2.00X versus 1.33X of the S&P 500 ETF IVV.
Government Support
Michael Bapis also pointed out that though there is no infrastructure bill right now, the Trump administration is infrastructure-friendly. Most believe that America is due for an infrastructure upgrade. Investors should note that even though there are considerable chances that the blue wave of Democrats will take control over the House and Senate in November, one can be assured of a ramp-up in infrastructure.
Democratic presidential candidate Joe Biden had proposed a $1.3-trillion infrastructure overhaul last year. Though he said he would fund the plan through tax increases on the wealthy and corporations, we see moderate increases in both tax rates as well as infrastructure activities under Biden’s rule (read: Trump or Biden, Infrastructure ETFs to Soar Higher).
Decent Earnings
In the CNBC article, Bapis also mentioned that the below-mentioned stocks could continue to benefit from the favorable environment. Remarkably, these stocks came up with upbeat earnings too.
Caterpillar Inc. (NYSE:CAT) reported second-quarter 2020 adjusted earnings per share of $1.03, which beat the Zacks Consensus Estimate of $1.77. The company’s quarterly revenues of $10 billion surpassed the Zacks Consensus Estimate of $9.2 billion.
Honeywell International Inc.(NYSE:HON) delivered better-than-expected results for the second quarter, wherein both earnings and revenues surpassed estimates. Adjusted earnings were $1.26 per share, surpassing the Zacks Consensus Estimate of $1.15. Honeywell’s second-quarter revenues were $7.477 billion, beating the consensus estimate of $7.237 billion.
Waste Management Inc.(NYSE:WM) also came up with better-than-anticipated results for the June-end quarter. Adjusted earnings per share of 88 cents beat the Zacks Consensus Estimate by 6% but were down 20.7% year over year. Total revenues of $3.56 billion outpaced the consensus estimate by 1.8% but decreased 9.8% year over year.
ETFs in Focus
Below we highlight a few industrials ETFs that could be tapped at the current level.
iShares U.S. Industrials ETF IYJ: Zacks Rank #2 (Buy); Up 11.8% Past Month
SPDR SP Aerospace Defense ETF XAR: Zacks Rank #2; Up 11.1% Past Month
SPDR SP Homebuilders ETF XHB: Zacks Rank #3 (Hold); Up 17.8% Past Month
Vanguard Industrials ETF VIS: Zacks Rank #3; Up 14.4% Past Month
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Vanguard Industrials ETF (VIS): ETF Research Reports
Industrial Select Sector SPDR ETF (XLI): ETF Research Reports
Technology Select Sector SPDR ETF (XLK): ETF Research Reports
SPDR SP Homebuilders ETF (XHB): ETF Research Reports
iShares Core SP 500 ETF (IVV): ETF Research Reports
SPDR SP Aerospace Defense ETF (XAR): ETF Research Reports
iShares U.S. Industrials ETF (IYJ): ETF Research Reports
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