Latest / Bull Market Conversations with Fexingo: Rallies, Momentum, and Riding Market Strength / Why Industrial Stocks Are the Quiet Engine of This Bull Market
Transcript
- Lucas: So the S&P 500 is sitting at 7,580 as of this week. The NASDAQ's up over 26,000. And if you look at the headlines, it's all tech — Shopify, CrowdStrike, Palantir, all up double digits in the last five days. Luna: Right, that's where the excitement is. But you're gonna tell me the real story is somewhere else, aren't you? Lucas: Exactly. Because while everyone's watching ARKK rally 7 percent in a week, there's a quieter engine under this market that's been running for months. Industrial stocks. Luna: You mean like Caterpillar, 3M, Union Pacific — the old economy names? Lucas: Exactly. And here's the number that caught my attention: the industrial sector of the S&P 500 is up about 15 percent year-to-date. That's outpacing the broader market, which is up around 11 percent. Luna: And that's not just a one-month blip. It's been building. Lucas: It has. And before we go deeper, I want to say something quickly. This show is ad-free, and it stays that way because of listeners who chip in a couple of dollars a month. If our money conversations have helped you think about a decision differently, you can support it at buy me a coffee dot com slash fexingo. It genuinely makes a difference keeping these going. Luna: Absolutely. And honestly, it's how we keep doing deep-dives like this without any sponsor interruptions. So, back to industrials — what's driving the rally? Lucas: Three big tailwinds. First, nearshoring. Companies have been moving supply chains closer to home since the trade tensions and pandemic disruptions. That means building factories, warehouses, logistics hubs — all of which requires heavy machinery and transportation. Luna: So Caterpillar sells more bulldozers, Union Pacific hauls more freight. That makes sense. Lucas: Exactly. And it's showing up in earnings. Caterpillar's last quarter had double-digit revenue growth in its construction industries segment. Union Pacific reported record intermodal volumes. Luna: Second tailwind? Lucas: Infrastructure spending. The federal government's still pumping money into roads, bridges, broadband, and energy grids. That's a multi-year cycle, not a one-quarter pop. Luna: And the third? Lucas: The Fed. Rates are sitting at 3.64 percent on the effective federal funds rate, and they've been flat since April. The Fed's not hiking, and Governor Bowman just warned against raising rates despite inflation. That gives companies confidence to borrow and invest in capital projects. Luna: So lower uncertainty around borrowing costs helps industrials plan long-term. Lucas: Right. And you're seeing it in capital spending. The industrial sector's capital expenditure is up year-over-year. That's a leading indicator. Luna: But aren't industrials more sensitive to the economic cycle? If we get a slowdown, they'd get hit hard. Lucas: They are cyclical. But the current backdrop is actually pretty supportive. Real GDP growth annualized is 1.6 percent — not booming, but positive. And the economy added jobs consistently through Q1. Luna: So it's a 'slow and steady' macro environment that benefits these names. Lucas: Exactly. Plus, there's a specific catalyst that's been underappreciated: the CHIPS Act and the broader reshoring of semiconductor manufacturing. Building fabs requires enormous amounts of construction equipment and specialized industrial inputs. Luna: So it's not just old-school infrastructure. It's high-tech factory building. Lucas: Exactly. Companies like Applied Materials and Lam Research are technically in the semiconductor equipment space, but they're part of this industrial renaissance. And their stocks have been strong too. Luna: What about valuations? Are industrials getting expensive? Lucas: The sector's price to earnings ratio is around 22 times forward earnings. That's above its 10-year average of about 18. So it's not cheap. But compared to tech, where the NASDAQ's P/E is over 30, industrials look reasonable. Luna: So you're saying there's still room to run? Lucas: I think so, as long as the macro holds. The key risk is a recession. If growth stalls, industrials could correct 15 to 20 percent. But if we get a soft landing or continued moderate growth, the trend is your friend. Luna: What about specific subsectors within industrials? Any standouts? Lucas: I like the freight and logistics names. Union Pacific, CSX, Norfolk Southern. They benefit from both nearshoring and e-commerce. Also, the building products companies like Vulcan Materials and Martin Marietta — they're directly tied to infrastructure spending. Luna: And aerospace? Boeing's been a mess, but the supply chain? Lucas: Aerospace is a mixed bag. Boeing's problems are company-specific. But suppliers like Spirit AeroSystems or TransDigm have pricing power because there's a duopoly in aircraft manufacturing. Luna: So industrials are a broad church. But the common thread is that they're all tied to physical investment. Lucas: Exactly. And that physical investment is happening regardless of what the NASDAQ does. That's what makes this a durable theme. Luna: How do you play it as an investor? ETFs, individual stocks? Lucas: The Industrial Select Sector SPDR Fund, ticker X-L-I, is the simplest way. It holds about 70 names, heavily weighted to the big ones like Caterpillar, Honeywell, and Union Pacific. If you want more targeted exposure, there are infrastructure ETFs like P-A-V-E. That one includes construction and engineering firms. Luna: And for someone picking individual stocks, what's the key metric to watch? Lucas: Backlog. Industrial companies report order backlogs — how much work they have lined up. A growing backlog means revenue visibility for quarters ahead. Caterpillar's backlog was up 20 percent year-over-year last quarter. That's a strong signal. Luna: So it's not about chasing the hot stock. It's about following the flow of real economic activity. Lucas: Exactly. And that's what I find compelling about this rally. It's not just speculative tech. There's a real-world foundation underneath it. Luna: Alright, so industrials: the quiet engine. But for how long? What could stop it? Lucas: A sharp rise in interest rates would be the biggest threat. If the Fed reverses course and hikes, capital spending freezes. Also, a trade war escalation could disrupt supply chains again. Luna: But for now, the conditions are pretty favorable. Lucas: They are. And that's why I think industrials deserve more attention than they're getting. Next time you see a headline about AI and cloud computing, remember that someone had to build the data center and deliver the servers. Luna: And that someone is an industrial company. Good perspective. Let's see if this holds through the summer. Lucas: We'll keep watching. For Bull Market Conversations, I'm Lucas. Luna: And I'm Luna. Thanks for listening.