Markets & Finance

2008 Sector Outlook: Industrials


Here's the second in a series examining the outlook for five sectors. S&P analysts' fundamental outlook for industrials is neutral

From Standard & Poor's Equity Research

How do key S&P 500 sectors stack up for 2008? Here is the second in a series examining the outlook for five S&P sectors: the four with marketweight recommendations that have the largest market cap weightings in the Standard & Poor's 500-stock index—and the one sector with an overweight recommendation. A selection of five of S&P's top-ranked stocks in each sector will also be featured. Be sure to check back in the days to follow for more sectors—and stock picks.

More information about S&P equity research can be found at http://outlook.standardandpoors.com.

Industrials

Sector Recommendation: MARKETWEIGHT

S&P 500 Market Cap Weighting: 11.6%

S&P recommends marketweighting the S&P 500 Industrials sector. Year to date through Nov. 23, the S&P Industrials index, which represented 11.6% of the S&P 500 index, rose 7.8%, compared with a 1.6% increase for the S&P 500. In 2006, the sector advanced 11.0%, vs. a 13.6% rise for the "500." There are 17 subindustry indexes in this sector, with Industrial Conglomerates being the largest at 32.8% of the sector's market value.

S&P equity analysts have a neutral fundamental outlook for the sector. Although a slowing U.S. economy should prevent significant multiple expansion, we believe 2008 earnings-per-share (EPS) growth for the sector will remain healthy, as more than 40% of sector revenues are now derived internationally. S&P Economics expects key Asian and European economies to remain resilient.

In addition, while an increasing share of Industrial revenues from higher-margin, aftermarket services lessens their cyclicality, we believe this is already reflected in relatively high sector valuations. The sector trades at a price-to-earnings (p-e) ratio of 14.9 times projected 2008 EPS, vs. 13.9 times for the broader market. Its p-e to projected five-year EPS growth rate of 1.1 times is in line with the broader market's 1.1 times.

Our technical opinion on the S&P 500 Industrials index remains neutral with a positive bias. The sector has pulled back to important support from the August lows, as well as a couple of other pieces of important support. The index was recently below its 17-week and 43-week exponential moving averages, but these averages have not crossed. Relative strength vs. the S&P 500 hit an all-time high in early August, and has been consolidating ever since. Weekly momentum is still in a downtrend, but is approaching oversold territory. We believe any price weakness is within the confines of a longer-term bull market.

S&P Equity Strategy believes the Industrial sector will perform in line with the broader market.

More information about S&P equity research can be found at http://outlook.standardandpoors.com.


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