Industrials: A Year of Resilience and Growth in 2024

A strong year for industrials
The industrials sector has had a positive year in 2024, with nearly half of the S&P 500's industrials sector stocks hitting all-time highs by March 1. This performance was driven by several factors, including infrastructure and onshoring investments, a strengthening economy, and technological advancements. Let's dive into the key drivers behind the sector's performance in 2024.

1. Infrastructure and onshoring investments
Government investments in infrastructure and onshoring initiatives played a significant role in the sector's performance in 2024. Legislation such as the 2022 Inflation Reduction Act and the 2021 Infrastructure Investment and Jobs Act allocated hundreds of billions of dollars for infrastructure, onshoring, combatting climate change, and the "electrification of everything." This massive investment helped drive long-term growth for the sector, addressing critical needs and creating new opportunities for industrials companies.

For instance, the 2021 Infrastructure Investment and Jobs Act allocated $1.2 trillion for transportation and infrastructure, directly benefiting industrials companies involved in construction, materials, and related services. Additionally, the 2022 Inflation Reduction Act included provisions for clean energy and climate change mitigation, further supporting the growth of industrials companies focused on renewable energy, energy efficiency, and sustainability.

2. Economic recovery
As the economy continues to recover, economically sensitive segments of the industrials sector have seen a catalyst for growth. The Institute for Supply Management (ISM®) Purchasing Managers Index (PMI®) has been in contraction territory for more than 12 months, signaling that the industrial economy is currently weak but poised for improvement. This trend, combined with a strengthening economy, has contributed to the sector's positive performance in 2024.

3. Technological advancements
The sector has seen significant advancements in technology, such as Industry 4.0, which is the next stage in the digitization of manufacturing. This includes the use of robotics, IoT, data analytics, AR, and other cutting-edge technologies. For example, a manufacturer adopting Industry 4.0 tenets might use drones to deliver parts and simplify assembly-line inspections. These technological advancements have helped industrials companies improve efficiency, reduce costs, and alleviate labor shortages, contributing to the sector's strong performance in 2024.

Specific industrials sub-sectors driving performance
In 2024, the industrials sector's performance was driven by several sub-sectors, with aerospace and infrastructure being notable examples. The aerospace industry has seen healthy demand from emerging markets like India and China, as well as a pressing need to replace older, less-efficient planes in developed markets. This has created opportunities for companies manufacturing aircraft, jet engines, and underlying components. Some specific companies mentioned in the materials that have illustrated this theme include aircraft manufacturer Boeing, jet engine maker General Electric, and Howmet Aerospace, a parts supplier that makes many of the original parts used to manufacture aircrafts. Additionally, components-maker TransDigm Group is a portfolio holding that has demonstrated this thesis.

In the infrastructure sub-sector, the massive investment in infrastructure, onshoring/reshoring, combatting climate change, and the "electrification of everything" through legislation such as the 2022 Inflation Reduction Act and the 2021 Infrastructure Investment and Jobs Act has the potential to drive long-term growth for the sector. This investment could help fuel long-term growth for the sector, as mentioned in the materials.

Comparing 2024 performance to historical averages and other recent years
Based on the information provided, the industrials sector's performance in 2024 was positive, with nearly half of the S&P 500's industrials sector stocks hitting all-time highs by March 1. This is the highest percentage and largest number of stocks in any sector to reach a record level this year. Specifically, 37 of the 78 stocks in the S&P 500 industrials sector reached all-time highs, compared to 130 stocks across the broader S&P 500 and 15 stocks in the information sector, and 3 stocks in the communications services sector.

To put this into context, the S&P 500 industrials sector's performance in 2024 was stronger than in recent years. For instance, in 2023, the sector's gains lagged the more sizeable returns of the S&P 500, with only a handful of mega-cap stocks driving the great majority of the market's gains. However, in 2024, the industrials sector has shown significant strength, with a larger number of stocks reaching all-time highs compared to other sectors.

In terms of historical averages, the industrials sector's performance in 2024 appears to be above average. While the specific historical averages are not provided in the materials, the fact that nearly half of the sector's stocks have reached all-time highs suggests that the sector's performance in 2024 has been strong compared to its historical performance.

Macroeconomic factors and industrials performance in 2024
In 2024, macroeconomic factors such as interest rates and inflation played a significant role in the performance of the industrials sector. According to the information provided, the sector faced challenges due to a high interest rate environment and wage inflation.

1. High interest rate environment: Many industrials firms were slow to react to past inflationary pressures, and those who had yet to recover their past margin performance faced an even greater challenge in expanding their margins in 2024. Decreased demand in several segments resulted in full warehouses and reduced traction, while customers' willingness to accept price increases decreased, leading to calls for cost reduction (Source: Industrials challenges in 2024).
2. Wage inflation: Industrial firms struggled with ever-increasing labor costs, as highlighted by substantial pay increases issued by the US and German militaries, the Mexican government's mandate of 30% wage increases, and record levels of wage inflation in the UK. These effects carried into 2024, significantly impacting labor-intensive manufacturing and professional services (Source: Industrials challenges in 2024).

These macroeconomic factors contributed to the challenges faced by industrials companies in 2024, as they grappled with profitability, labor costs, and customer demands. However, the sector also presented opportunities for growth, as discussed in the following section.

Opportunities for growth in the industrials sector in 2024
The return to a profit mindset holds great growth potential in 2024. And our latest B2B Commercial Trends Report reveals the majority of companies are optimistic about this year. Companies need to set their sights on the value they deliver and adjust their pricing and sales strategies accordingly. Many are still grappling with the transition from volume metrics to profit metrics, but industrials firms must recognize that inflation affects a product's value as much as its costs. For instance, in Mexico, where wages have been mandated to increase by 30%, the value of a robot that replaces labor has risen by 30%.

Automation technology, hardware/software combinations, and products that impact labor will take center stage in 2024. New offerings and business models that combine hardware and data will add value and drive competition, especially with the introduction of new regulations like the European Data Act.

Adjusting to changed customer demand and re-assessing growth paths
It's crucial to adjust to shifting customer demand. The rise of AI and data centers has created a surge in demand for components and systems across various industries. New semiconductor and battery factories lead to increased demand for factory automation equipment and solutions. Finally, the call for green and renewable energy has also set a course for the expansion and modernization of energy infrastructure and power lines. To tap into these opportunities, companies must prioritize their portfolios and align them with the changing market demands.

While investments in new equipment may be postponed, the demand for after-sales business and services will rise. By charting the right course and prioritizing investments, companies can generate and extract value, even in the face of challenging sustainability regulations.

Companies may also want to re-assess their growth ambitions and update their strategies, considering how their offering currently fits with market demands. Where do you want to grow in 2024, in terms of regions, segments, and applications, and how do you want to make this happen?

Embracing technological developments: Creating efficiencies and new revenue streams
With an abundance of data and new tools at their disposal, industrials companies can look forward to efficiency gains. Not only does benchmarking and automation in sales and pricing processes lead to smoother operations, but it also enables companies to better understand their customers and tailor their offerings to meet their needs. By embracing technological developments, industrials companies can create new revenue streams and improve their competitiveness in the market.

In conclusion, the industrials sector has had a strong year in 2024, driven by infrastructure and onshoring investments, a strengthening economy, and technological advancements. Despite facing challenges from macroeconomic factors such as interest rates and wage inflation, the sector has presented opportunities for growth through a focus on profitability, automation, and embracing technological developments. As the sector continues to evolve, investors should keep a close eye on the key trends and prospects that lie ahead.