Bridging the Strategy-Execution Gap in Industrial Investing Amid Divergent Economic Signals

The industrial sector stands at a crossroads, where conflicting signals from economic data and market sentiment create both challenges and opportunities. While recent global industrial PMI trends suggest moderation-such as the U.S. manufacturing PMI slipping to 51.8 in December 2025, the weakest in five months-broader economic fundamentals tell a different story. GDP growth hit 4.3% year-on-year in Q3 2025, and labor market strength, with initial unemployment claims below 200,000, underscores resilience. This divergence between near-term sentiment and structural underpinnings highlights a critical mispricing in industrial equities, offering a window for investors to capitalize on undervalued opportunities.

Divergence Between PMI and Fundamentals

The U.S. manufacturing PMI decline reflects short-term headwinds, including a year-long first drop in new orders and export challenges from tariffs and trade frictions. However, these metrics fail to capture the sector's durable demand drivers. For instance, firms continue to build inventories and expand employment, anticipating stronger conditions in 2026. Meanwhile, input cost inflation, though elevated, has eased to an 11-month low, signaling moderating pricing pressures.

This disconnect is not unique to the U.S. ASEAN factories reported robust output growth in 2025, driven by resilient manufacturing activity. Yet, global PMI data often aggregates regional disparities, masking the nuanced dynamics of individual markets. Investors must look beyond headline numbers to identify where structural trends-such as reshoring, automation, and infrastructure spending-are creating long-term value.

Policy Tailwinds and Structural Shifts

Recent policy developments in Q4 2025 have further tilted the industrial sector's favor. The One Big Beautiful Bill Act (OBBBA) introduced incentives like a 35% Advanced Manufacturing Investment Credit for semiconductor manufacturing and expanded Research & Experimental expense deductions. These measures are accelerating automation adoption and innovation in construction, while executive orders streamlining AI/data center permitting have reduced regulatory friction.

Tariff policies, meanwhile, are reshaping supply chains. While they increase input costs, they also incentivize reshoring, as seen in the U.S. manufacturing sector's inventory buildup. This shift is particularly beneficial for companies with exposure to domestic infrastructure and defense spending, which are expected to see sustained demand.

Undervalued Industrial Stocks: A Strategic Playbook

Amid this backdrop, several industrial stocks are trading at significant discounts to their intrinsic value, offering compelling entry points. Morningstar analysts highlight CNH Industrial (CNH) and Terex (TEX) as undervalued plays in construction and agricultural machinery. CNH, for instance, trades at a 48% discount to its $20 fair value estimate, supported by its second-largest global agricultural business and a robust dealer network.

The Boeing Company (BA) and Lockheed Martin (LMT) also stand out. Boeing's 10.2% revenue growth and intrinsic value of $304.1 suggest undervaluation despite its $168.1B market cap. Lockheed Martin's 16.3% ROIC and strong free cash flow generation further cement its appeal as a long-term industrial play. RBC Bearings (RBC), with 21% annual revenue growth and a 15.6% free cash flow margin, exemplifies the sector's innovation-driven resilience.

Bridging the Gap: A Call for Strategic Execution

The key to capitalizing on these opportunities lies in bridging the strategy-execution gap. Investors must move beyond PMI-driven pessimism and focus on structural tailwinds-such as infrastructure spending, automation, and reshoring-that are redefining the industrial landscape. For example, the OBBBA's emphasis on semiconductor manufacturing and AI infrastructure is creating durable demand for companies like CNH and RBC Bearings. Similarly, defense and water supply projects are insulating the sector from cyclical downturns.

However, execution requires vigilance. While tariffs and geopolitical tensions introduce volatility, they also create opportunities for firms with diversified supply chains and strong balance sheets, such as Lockheed Martin and Boeing.

Conclusion

The industrial sector's current mispricing reflects a myopic focus on near-term PMI trends, overlooking the broader economic and policy-driven forces at play. By identifying undervalued stocks with strong fundamentals-such as CNH, Terex, Boeing, and RBC Bearings-investors can position themselves to benefit from the sector's long-term trajectory. As the U.S. and global economies navigate divergent signals, strategic execution will be the differentiator between those who merely observe and those who capitalize.