Industrial shares are on track to drive the stock market’s gains on a quarterly basis for the first time in more than five years, fueling anxiety about a rapid unwind should trade negotiations with China stall. The S&P 500 industrials sector, which includes stocks like Caterpillar, Boeing and American Airlines, has led this year’s rebound with a 16% increase. The group hasn’t been the best performer in any quarter since the end of 2013 and has only ever held the title four times, according to Dow Jones Market Data. Industrial stocks, heading for their best quarter since 2009, have never led the index for a full calendar year. The group has far outpaced the S&P 500’s 9.5% rally and is beating the next-best sector, the energy group, by 2.95 percentage points, a gap that would be the largest between industrials and the second-place sector in any of the quarters industrial stocks have outperformed. Analysts say the industrial sector’s strength is especially notable because there is more uncertainty than normal about the accuracy of corporate forecasts in light of the continuing trade negotiations between the U.S. and China. Meanwhile, economic data in Europe and Asia have cooled, and investors on Friday will be watching industrial production figures for January. The industrials sector includes many manufacturers and transportation companies typically tied to the strength of the global economy and Chinese demand because of how much those trends affect their revenue and future growth prospects. The group is still expected to post a modest 2.8% increase in first-quarter profits from a year earlier, compared with a decline expected for the broader S&P 500, FactSet data show. Some analysts caution those targets could change dramatically if the trade outlook sours. Although stable U.S. growth and trade optimism have buoyed industrial stocks recently, analysts warn the run could stall if the U.S. and China aren’t able to reach an agreement by a March 1 deadline. U.S. tariffs on Chinese goods are set to increase at that point—a move that is expected to further raise costs for companies at a time investors are nervous about a slowdown in profit growth. “What's different about this year than I think many years in the past is we have many more unknowns,” Honeywell International Chief Executive Darius Adamczyk said on the company’s Feb. 1 earnings call. Are you buying industrial stocks, or do you think another sector should be the market's leader? Let the author know your thoughts at amrith.ramkumar@wsj.com. Emailed comments may be edited before publication in future newsletters, and please make sure to include your name and location. |