As the U.S. grapples with the implications of President Donald Trump’s tariff policies, the manufacturing sector appears to maintain a degree of optimism and resilience. Although anxiety persists regarding the long-term effects of tariffs, recent developments indicate that manufacturing may be on the cusp of a recovery. The Institute for Supply Management’s (ISM) Manufacturing Purchasing Managers’ Index (PMI) recently recorded a notable score of 50.9% in January, signaling the first expansion in the manufacturing sector after a prolonged period of contraction lasting 26 months. This index serves as a vital indicator of economic health, where readings above 50% signify growth and those below indicate decline.
In addition to the improved PMI, the New Orders Index, another pivotal measure, demonstrated encouraging signs by registering a growth spurt, hitting 55.1% in January. This marks a pivotal turn of events, as it reflects three consecutive months of expansion after experiencing seven months of decline. Market analysts are optimistic that despite the looming threats of tariffs, the ISM Manufacturing Index is likely to continue above the pivotal growth threshold in the upcoming years. Wolfe Research, through their expert analysis led by Chris Senyek, anticipates favorable conditions for specific industries, including Capital Markets, Semiconductors, and Transport sectors.
The backdrop of these positive indicators is Trump’s decision to sign an executive order imposing a 25% tariff on steel and aluminum imports. This controversial move has sparked debates about its potential repercussions, including impact on trade relations. With the president’s mention of reciprocal tariffs against trading partners, market stakeholders have shown mixed reactions. The significance of these tariffs cannot be overstated, as they can shape the trajectory of growth within the manufacturing landscape.
Wolfe Research’s proactive approach underscores their search for potential beneficiaries within the S&P 1500. Their criteria focus on companies within the financial, technology, industrial, and discretionary sectors that could experience substantial growth as the manufacturing index stabilizes and progresses. Firms that demonstrate a historical correlation with the New Orders Index from 2012 onwards and maintain a market cap exceeding $2 billion pique their interest.
Among the highlighted companies, United Parcel Service (UPS), despite experiencing more than a 9% decline in year-to-date performance, showcases promising indicators for potential recovery. With a robust ISM New Orders correlation of 0.58, analysts exhibit a unanimous positive outlook; more than half of the analysts covering UPS advocate a strong buy rating. The stock’s consensus price target suggests an upside of around 16%, signaling investor confidence in its rejuvenation.
CSX, another industrial player, demonstrated resilience with an ISM New Orders correlation of 0.57, indicating a strong relationship with the manufacturing trends. Though CSX has also trailed the S&P 500 performance for the year, it has managed a two percent increase since January, suggesting a steady recovery path. Analysts are optimistic, with 19 out of 28 analysts bullish on CSX’s stock, hinting at an anticipated 12% upside towards the $37 target.
In the financial sector, Charles Schwab stands out with an impressive correlation of 0.54 relative to the New Orders Index. Unlike its industrial counterparts, Schwab has outperformed the broader market this year, posting gains of over 9%. Its upward trajectory continues, with 16 out of 23 analysts recommending it as a buy. A consensus target of $88 suggests an additional 8% growth potential from current levels.
While the shadow of tariffs looms large over the U.S. manufacturing sector, indicators suggest that growth is on the horizon. Key metrics like the ISM Manufacturing PMI and the New Orders Index provide a basis for cautious optimism. Companies such as UPS, CSX, and Charles Schwab offer promising avenues for investment as they align with the expected trends within manufacturing. As the economic landscape evolves, stakeholders must remain vigilant and adaptive, continually assessing the impact of policy changes while seizing emerging opportunities in the market.