Overall, 2023 was a great year for stock markets: a strong rebound doubled S&P 500’s value when compared to year-end 2018. Behind the 2023 recovery were corrections in fundamentals (inflation falling to about 3% after peaking at 9% in June 2022, unemployment held steady at 3.5% for more than 18 months, and crude oil prices rebounded to 2019 levels), as well as anomalous trends, such as generative AI surge ($2.2 billion in private equity and venture capital investments in 2023 alone), along with the two-decade norm of higher returns during an off-year for US elections (8.3% average annual returns for the S&P rise to 16.0% in an average election year; they were 24.2 in 2023).

The market euphoria continues to focus on the big names—the top 10 companies in the S&P 500—now make up 34% of the S&P 500's capitalization, an increase of 15 percentage points over the past decade. Once again, the industrial sector has gone unnoticed in most media coverage. That lack of attention could cause investors to miss out on a sector that is a major force in the economy coupled with its stellar returns and significant tailwinds. As such, the sector seems to be poised for a renaissance—industrial companies can capitalize on it by drawing learnings available from studying the top performers.

A Force in the Stock Market‍

Industrials are a behemoth, representing 22% of the total market cap of US public companies by the end of 2023 and accounting for one-fourth of the market cap surge of the past five years (year-end 2018–23). This stock market engine delivered stellar returns in the last five years and has been consistent and resilient through tumultuous times. Total shareholder returns (TSR) rose 20.9% from 2018 to 2023, 360 basis points, more than S&P500. Furthermore, industrials were the only sector that more than doubled its market cap since the pandemic-related slowdown.

In fact, the evidence points to a resurgence of the sector, based on increases observed in manufacturing. Between the first quarter of 2018 and the fourth quarter of 2023, factory output increased 1.2 times to fill orders that reached a 15-year high. And companies’ hiring in 2022 and 2023 more than offset the pandemic-related job cuts of January 2020 to January 2021: 750,000 additions to the workforce, versus job losses of 640,000.

What’s Powering the Resurgence‍

Three trends in the US economy played a large part in this resurgence:

1. A “make in America” movement. Companies that once embraced offshoring are seeing the advantages of producing near their US customers. Major corporations including Ford, LG, Toyota, and US Steel have led the charge with billions of dollars of new factory investments that are adding thousands of direct manufacturing jobs at each new location.
2. Government initiatives. Congress has in recent years pursued stimulus legislation including the Infrastructure Investment and Jobs Act (IIJA), the Inflation Reduction Act (IRA), and the CHIPS Act. The IIJA allocates $1.2 trillion for clean-water access; high-speed internet; roads, bridges, and rail; airports and ports; electric-vehicle chargers; climate resilience; and cleanup of legacy pollution. The Inflation Reduction Act provides $500 billion for spending to lower energy costs, support domestic manufacturing, foster small businesses, manufacture electric vehicles, and provide for cleaner air. The CHIPS Act allocates $160 billion to $200 billion for boosting semiconductor manufacturing and R&D, advancing future technologies, and expanding opportunities for careers in science, technology, engineering, and mathematics (STEM).
3. Industrials’ innovation culture. Despite US manufacturing’s common association with the Rust Belt, manufacturers boast cultures of innovation. Most US patents (55%) have been awarded to companies in the manufacturing sector. In addition, 70% of private-sector R&D investments are made by manufacturers, and 60% of US exports are manufactured goods (Source: US Department of Defense). In 29 of the 50 states (Howmuch.net), the most profitable industry is part of the industrial sector (aerospace, automotive, machinery and mechanical appliances, or precision instruments).

Work to Be Done

Despite these advantages and the sector’s size, major work still needs to be done. Industrials’ contribution to GDP continues to decline, productivity growth lags other sectors, and the sector’s overall valuations trail the market. Manufacturing contributed 13.3% of GDP in 2003, 11.8% in 2013, and 10.2% in the first half of 2023. Labor productivity in manufacturing increased 1.2 times between 2002 and 2022, compared with a 1.5-times increase for all nonfarm businesses. Compared with other sectors, industrials have relatively low valuations. In 2023, the enterprise value to sales (trailing twelve months) multiple for US industrials was 2.8, compared to 5.5 for Tech, 4.2 for Utilities, 3.6 for Financials, and 3.0 for Communication Services.

How to Ride the Wave‍

The companies in the sector can ride this wave of resurgence by drawing lessons from the leaders. The example of the high-performing companies suggests four measures to take:

1. Active portfolio management. Portfolio management sets the direction for the company and ensures that its assets are working toward a clear and compelling objective. M&A that matters will be directed to strategy, including divestments of noncore assets.
2. Resilience and transformation culture. A resilience and transformation culture is a way of operating that focuses on how a company can transform itself into a desired state in a way that enables its people to adjust to unanticipated changes. A practical approach to implementing such a culture is to set financial goals, combined with a plan for offsetting the impact of unpredicted events.
3. Holistic approach to innovation. A holistic view of innovation involves a three-part focus on product, operations, and business model. Examples of promising areas for innovation in industrials include smart technology, product sustainability, Industry 4.0, and end-to-end integration.
4. Strong investor engagement. For companies’ efforts to show up in higher valuations, leaders need to manage investor expectations. Well-informed investors are aware of the challenges of running a diversified company, so investor engagement includes developing a business model that balances conflicting needs and interests, as well as communicating in a compelling way.

The tailwinds are in place for the already-significant US industrial sector to enter a renaissance. Now is the time for companies to demonstrate that they can overcome challenges and seize the moment.

To learn more about the playbook of top performers of industrials sector, read our full report on: Now more than ever, industrials need resilience and performance transformation (https://www.ayna.ai/publication/now-more-than-ever-industrials-need-resilience-and-performance-transformation).

Also, tune into our Titanium Economy podcast, where leaders of industrials sector including, Andy Mattes (Former CEO of Coherent; Board Member at Cohu, Inc. ), Bob Chapman (CEO of Barry-Wehmiller , Mark Behrman (CEO of LSB Industries, Inc. ), Mike Olosky (CEO of Simpson Strong-Tie ), and Stephen Smith (CEO of Amsted Industries share stories of leading transformative growth of their respective companies.

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