Cyclical stocks are dropping on strong earnings reports—a disappointment for anyone who was hoping for a share-price pop—butgreat big-picture newsfor investors.
Enough large industrial companies have reported their first-quarter numbers to get a sense of how things are going in the manufacturing economy. On the list are3M(ticker: MMM),Carrier Global(CARR),General Electric (GE),Altra Industrial Motion(AIMC),Caterpillar(CAT),Honeywell International(HON),Rockwell Automation(ROK) andParker-Hannifin(PH), with a combined market capitalization of about $625 billion.
That is a little smaller than even one Tesla (TSLA), at $650 billion, but big for an industrial company is a market cap of between $100 billion and $200 billion.
Those eight companies are all shapes and sizes and serve dozens of industrial end markets. Every one of them earned more than expected, with an average outperformance of 30%. Of the seven that offer full-year financial forecasts, five raised their calls. The other two, GE and 3M,maintained their guidance.
All eight stocks, however, dropped after the earnings came out. The average decline was about 2%.
That isn’t a bad thing, though. It makes it clear that stocks are in a bull market, when investors typically sell in response to positive news and buy when stocks dip lower. If stocks are in a bull market, then investors can expect more gains, either now or after a modest downturn.
The eight stocks are beating theS&P 500by about 3 percentage points on average. The stock market is forward-looking, so that outperformance signals expectations of strength, in terms of earnings and share prices, as well as for the industrial economy.
It matches up with what is happening on the ground, and what management teams are saying. Caterpillar’s sales and earnings were muchbetter than expected, partly because Caterpillar dealers needed to restock depleted inventories. If dealers are ordering machines so they have them on hand to sell to farmers, miners, and builders, that is another good sign for coming demand.
Carrier CEODave GitlintoldBarron’she is optimistic about the year ahead. Carrier makes air-conditioning equipment. Air quality is becoming a bigger issue in commercial buildings, and residential business is booming as people look to spend more money on their houses.
Altra makes industrial automation equipment, selling parts to thousands of equipment makers. CFO Christian Storch toldBarron’shis company believes it can increase sales as well as profit margins in coming quarters.
3M CEO Mike Roman was a little more conservative. Still, he toldBarron’sit was astrong startto the year and that he expects the economy to strengthen. 3M didn’t increase its financial forecasts, though. Roman believes conservatism is warranted given the uncertainty surrounding the global distribution of Covid-19 vaccines.
To be sure, it is possible that stocks are selling off because the current operating environment is as good as it will be. Investors shouldn’t worry about that, though.
The manufacturing economy in the U.S. is growing at the fastest rate since the 1980s, but total industrial production still hasn’t reached prior peak levels. What is more, automation, renewable power, and the process of bringing manufacturing back to the U.S. from overseas are allsecular trendsthat will help industrial growth in coming years.
Johnson Controls(JCI) is another large industrial conglomerate, focused on commercial buildings, thatreports earningsFriday morning. Given the performance of its peers, a so-called beat and raise quarter is probably coming. Expect the stock to fall 2%.