Al Root
Industrial and manufacturing stocks have been strong amid the AI data center building boom, record commercial aerospace demand, and record military spending.
Things were getting even better with other areas of the industrial economy picking up, promising to add to growth rates for suppliers of parts and equipment. There is a problem, though. Inflation has reared its ugly head again.
Fastenal is an industrial distributor selling hundreds of thousands of products to tens of thousands of customers. It offers investors a close to real-time look at the health of the industrial economy.
Fastenal reported first-quarter numbers on Monday. Quarterly sales grew 12.4% from a year ago. It was the fastest growth since 2022 and the third consecutive quarter of double-digit sales gains.
Still, shares dropped almost 7% in response. "What impacted us this quarter...was pricing versus cost," said CFO Max Tunnicliff on his company's earnings conference call. "On pricing, we realized approximately 3.5% year-over-year, and that compares to 3.3% in the fourth quarter, not enough to offset inflation."
Fastenal's price/cost problem is the latest example that the inflation genie hasn't been put back in the bottle. There are other examples.
The Institute for Supply Management Purchasing Managers' Index, a key gauge of manufacturing activity, has been in growth territory for the past three months, a welcome change to what amounted to a brutal three-year industrial recession. But, the pricing component of the index came in at 78.3 in March, up from 70.5 in February. A reading above 50 indicates prices are rising. A reading of 78 indicates prices are rising fast and faster than they were in the prior month.
The Producer Price Index, or PPI, also referred to as wholesale inflation, has also been running hot lately. The February PPI reading rose 0.7% from the prior month, faster than January's 0.5% monthly rise. February was the third consecutive month of strong PPI readings.
The March PPI reading was up 0.5%, better than the 1.1% economists projected. Rising oil prices didn't impact prices as much as feared. Still, wholesale prices were up 4% from a year ago, the largest 12-month advance since increasing 4.7% in February 2023.
An inability to offset inflation could crimp earnings growth for the sector, which is expected to be robust.
Industrial companies in the S&P 500 are expected to grow sales in 2026 by 6%, according to FactSet. Operating profit, however, is expected to jump 22%, with profit margins rising to about 14% from 12%.
That rapid growth is responsible for stock gains and is probably the biggest reason that industrial stocks fetch an average of about 26 times estimated 2026 earnings. The S&P 500 trades for closer to 21 times.
Through early trading on Tuesday, the Industrial Select Sector SPDR ETF was up about 37% over the past 12 months, eight percentage points ahead of the S&P 500.
Investors will get a bevy of industrial earnings in the coming weeks, including reports from GE Aerospace, GE Vernova, Honeywell, and Lockheed Martin.
Through early trading on Tuesday, those four stocks are up 81% on average over the past 12 months, which means investors expect earnings beats and guidance raises from the quartet.
Investors won't want to hear how inflation is a new headwind in 2026.
Write to Al Root at allen.root@dowjones.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
April 14, 2026 12:03 ET (16:03 GMT)
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