Industrials: Ready for takeoff?

The industrials sector delivered strong returns on an absolute basis in 2024, slightly lagging the market in what was a good year for stocks.

For 2025, I’m optimistic about the prospects for industrial stocks. In my opinion, there is potential value in a number of specific segments and themes, including reshoring, an aging air fleet, and improving new orders as manufacturing continues to recover from COVID-sparked disruptions.

2024: A year of strong absolute performance

Industrials had started the year strong, generally keeping up with the S&P through the end of April, but then underperformed in May and June. The sector then bounced back as one of the market’s stronger sectors in July and largely hung on to those relative gains through mid-December. This stop-and-go performance reflected a tension between optimism about a potential soft landing for the US economy and a pipeline of big construction projects and pessimism about weakness in manufacturing surveys and historically high stock valuations.

2025: Onshoring, aerospace, and housing

In the new year, I’m looking for opportunities that may arise from several big themes. The first of those themes is the return of manufacturing to the US from other countries. A variety of factors are producing an unprecedented push to reinvest in domestic infrastructure, to bring supply chains onshore to reduce geopolitical risk, and to increase investments in electrification and the development of artificial intelligence.

The COVID-19-related shutdowns of trade and commerce created severe disruptions for companies in many industries and have caused many firms to reconsider the wisdom of global supply chains. Increasing geopolitical tensions are also increasing the appeal of moving operations back to the US. In addition, government policies including the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the CHIPS Act are encouraging the return of domestic production.

This reset of priorities has already produced a surge in announcements in North America of projects with budgets of more than $1 billion. The value of projects announced since 2020 is roughly $1.9 trillion, and only about one-quarter of these have entered the construction phase, which implies that the majority of this work may still lie ahead. This could bode well for a wide-ranging group of industrial companies, including equipment rental specialist United Rentals (),² Trane Technologies (), a maker of heating, ventilation, and air conditioning products and services, and Eaton Corporation (), a provider of electrical equipment.

A second theme I’m watching is commercial aerospace. This market has experienced supply and demand turbulence in recent years. The grounding of the Boeing 737 MAX planes in 2019 reduced the supply of planes available to airlines. Next, COVID-19 hit and the aerospace industry cut production and laid off experienced workforces. Many of those experienced workers did not return when companies began to increase production. The resulting quality and productivity issues further worsened the shortage of new planes as travel recovered to pre-COVID levels. As a result, airlines have had to keep older planes in service for longer, and as their fleets grow older, spending on parts and maintenance has increased. This could benefit companies such as GE Aerospace (), which makes and repairs aircraft engines, TransDigm Group (), an aftermarket aircraft parts supplier, and FTAI Aviation (),³ an engine leasing and aftermarket repair business.

I have also seen potential opportunity in a variety of industrial companies that have been impacted by post-COVID supply-and-demand imbalances. After the initial COVID-induced supply shortages, many companies then overinvested in inventories—causing glut conditions—and subsequently cut new orders with industrial companies. This challenging environment has been reflected in a roughly 2-year stretch of weak readings for surveys that measure the health of the US manufacturing sector. However, given the length of the downturn, which has given customers time to slowly shrink their inventories, and given the possibility of further Federal Reserve interest-rate cuts, I think it's possible that the operating environment could improve over the next couple of years. Stocks that have illustrated this theme include multi-industrial companies, such as Ingersoll Rand (), ITT (),⁴ and Parker Hannifin (), as well as transportation companies that could see increased business from transporting new inventory, including Knight-Swift Transportation Holdings (),⁵ Old Dominion Freight Line (),⁶ and XPO ().⁷

Finally, interest-rate cuts could help stimulate the housing market if mortgage rates eventually also fall. This could benefit building product companies, particularly those with exposure to the repair and remodeling market. Fortune Brands Innovations (),⁸ AZEK (),⁹ and Simpson Manufacturing ()¹⁰ are examples of recent portfolio holdings that have exemplified this thesis.

A policy tailwind?

One other theme I’ve been watching is how policy changes from the incoming administration and Congress could impact the sector. In many ways, I believe upcoming shifts could be broadly favorable for this sector. Potential deregulation could increase confidence for company managements, their customers, and investors alike. Many companies have said recently that their customers are hesitant to make capital investments and place orders. The election outcome may inspire more confidence for these businesses to move forward with their investments.

Policy shifts from the incoming administration could also provide a push for further reshoring and reindustrialization, which may be especially positive for domestic producers. This work could require an increased amount of construction equipment and materials to build this capacity, as well as labor to complete these projects.

A diverse sector may mean more opportunities

The companies in the industrials sector differ widely in the markets they serve, their business models, and the cycles of their businesses. This diversity tends to create a lot of opportunity. Combine that diversity with a resilient US economy and Fidelity’s comprehensive industry and company research, and I believe 2025 could offer a very favorable environment for stock picking.