I. On Industrials
Investors are suffering from AI fatigue. They've concluded that there is no way to estimate whether all the capital spending on AI infrastructure will generate good ROIs in the coming years. What they do know is that hundreds of billions of dollars are being spent on AI capex in the here and now. That explains why S&P 500 Industrials is the second-best-performing of the 11 S&P 500 sectors with a gain of 17.7% ytd (chart). That's ahead of the 15.4% gain for the S&P 500 Information Technology sector.
Within the S&P 500 Industrials sector, several of the industries have benefited from the AI capex boom, especially Construction Machinery, Electric Equipment, and Industrial Conglomerates (chart). They should continue to do so, and we continue to recommend overweighting the sector.
The latest manufacturing data support our recommendation:
(1) Durable goods. June durable goods orders rose by 0.3% m/m, but the details were much stronger. Orders excluding transportation increased 0.6%, while core capital goods orders (nondefense ex-aircraft), a key gauge of business investment, rose 0.9% and 12.5% y/y, the strongest annual increase since November 2021 (charts)!
The major components of durable goods orders are at record highs (chart).
Orders for machinery necessary to operate data centers are especially strong (chart).
Unfilled orders for computers and electronic products rose to a record $157.4 billion in June (chart). The increase highlights robust demand for AI-related infrastructure, including servers, semiconductors, networking equipment, and other technology hardware.
