Industrial sector's gains to be tested as earnings ramp up
NEW YORK (Reuters) -The industrial sector has led the way for U.S. equities during a topsy-turvy year on Wall Street, but its strength will be tested as earnings season heats up.
S&P 500 industrials, which include aerospace companies, electrical equipment and machinery makers, transportation firms and building products companies, have gained 15% so far in 2025. That's the best year-to-date performance of the S&P 500's 11 sectors and more than double the gain of the overall index.
Momentum for the industrials sector and the broader market will be in focus with a heavy upcoming week of second-quarter earnings, which includes reports from more than one-fifth of the S&P 500, led by Alphabet and Tesla, the first of the "Magnificent Seven" megacap tech and growth companies to report.
The S&P 500 has surged 26% since April, as investors shook off fears about a recession which had stemmed from President Donald Trump's "Liberation Day" tariff announcement.
This earnings season "seems to be especially important because of the rebound that the market has had," said Chuck Carlson, chief executive officer at Horizon Investment Services. "I would think that that has built in a fair amount of optimism in terms of earnings."
A number of industrials will be in the earnings spotlight as well.
Aerospace and defense stocks have boosted the sector's performance this year, driven by heightened geopolitical tensions in the Middle East and Ukraine and fresh spending commitments by Germany and other nations.
The S&P 500 aerospace and defense industry group has surged 30% this year. Defense companies to report in the coming week include RTX, Lockheed Martin and General Dynamics.
GE Aerospace, whose shares have soared about 55% this year, raised its 2025 profit forecast on Thursday.
Another industrial company spun off from legacy General Electric last year, GE Vernova, has seen its shares skyrocket over 70% this year, making it the best-performing industrial sector stock. The power equipment maker's results are due Wednesday.
The push for reshoring infrastructure and expansion of artificial intelligence, which has lifted demand for cooling systems and factory automation, are two themes that have supported a number of stocks in the industry, including Eaton and Rockwell Automation, said Robert Pavlik, senior portfolio manager at Dakota Wealth Management.
Another stock that has supported the industrial sector this year: Ride-hailing giant Uber, whose shares are up roughly 50%.
"Unlike many non-Tech groups, there are a lot of solid stories here that don't rely on macro forces to deliver solid forward returns," Nicholas Colas, co-founder of DataTrek Research, said in a note on Wednesday. Large cap industrials still look attractive despite the group's recent run, Colas said.
Indeed, while industrials have been viewed historically as closely tied to the fortunes of the economy, declines for a number of growth-cycle-linked stocks have weighed on the sector's performance.
Shares of package delivery firms UPS and FedEx have posted sharp declines, while airlines including United Airlines and trucking companies such as JB Hunt Transport Services are also negative for the year.
"There are economically sensitive (areas) within industrials that are not doing well," said Walter Todd, chief investment officer at Greenwood Capital.
Other industrial companies slated to report in the coming week are Honeywell, Union Pacific and United Rentals.
Beyond earnings, Wall Street will continue to focus on any developments on trade ahead of August 1, when higher U.S. tariffs on numerous trading partners are set to take effect.
Investors will also be sensitive to news on the Federal Reserve, with Fed Chair Jerome Powell facing fresh pressure from Trump to resign as the president presses the central bank to lower interest rates. The Fed's next monetary policy meeting is July 29-30.
The S&P 500 has climbed about 7% so far this year.
The market has shown resilience despite "an incredible amount of uncertainty," said Eric Kuby, chief investment officer at North Star Investment Management Corp.
"We continue to be surprised at how well stocks are trading given a lot of what would seem to be significant headwinds," Kuby said.
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