Momentum reversal is ringing alarm bells for industrial stocks

Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials This advertisement has not loaded yet, but your article continues below.HomeInvestorMomentum reversal is ringing alarm bells for industrial stocksThe SP 500 Industrials index has tumbled 6.1 per cent since Aug. 14, hit by the Iran war, oil prices and the AI trade reversalAuthor of the article:Last updated 22 minutes ago Concerned that capital spending on data centres may not meet sky-high hopes, traders have dumped chipmakers and power equipment names alike. Photo by Michael M. Santiago/Getty ImageA sudden reversal in momentum for previously high-flying shares of industrial companies over the past three weeks has some investors bracing for more pain ahead.THIS CONTENT IS RESERVED FOR SUBSCRIBERS ONLYSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.SUBSCRIBE TO UNLOCK MORE ARTICLESSubscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.REGISTER / SIGN IN TO UNLOCK MORE ARTICLESCreate an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.THIS ARTICLE IS FREE TO READ REGISTER TO UNLOCK.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountThe S&P 500 Industrials index has tumbled about 6.1 per cent since as of Tuesday, reaching its last record on Aug. 14 as the Iran war once again pushed up oil prices and the artificial intelligence trade went into reverse.Technical alarm bells have started to ring. The selloff has dragged the index below its 50-day and 100-day moving averages, measures of its short-term and medium-term price trends.Canada's best source for investing news, analysis and insight.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Investor will soon be in your inbox.We encountered an issue signing you up. Please try again“It is likely that breaking below these moving averages steepens the decline in the short term,” said Brian Mulberry, chief market strategist at Zacks Investment Management. The index is now likely to test its 200-day average, a “key level of support” that is about 2.5 per cent below where it’s trading now, Mulberry said.Mulberry blames the selloff on a breakdown in the momentum trade that had powered the sector to its recent highs, while others on Wall Street point a finger at economic forces.Oil prices have resumed their march higher as shipping through the Strait of Hormuz remains disrupted, keeping inflation expectations and long-term bond yields elevated. That’s a toxic cocktail that threatens to increase production prices and the costs that capital-intensive manufacturers pay to borrow money, while dealing a blow to the broader economy that drives their sales.And these headwinds are swirling as the industrials group trades at some 23.7 times estimated earnings for the next 12 months, a premium to the broader S&P 500 index’s multiple of 19.4.“It’s a recipe for a pullback,” said Brian Sponheimer, a portfolio manager at Gabelli Funds. “If you’re a trader, it makes the path of least resistance pressing the sell button.”Still, there are signs that so many investors have already hit the sell button that the worst of the declines could be over. In a note last week, Bank of America Corp. flagged “capitulation” among its clients, who have dumped shares in the sector to a degree never before seen in data going back to 2008.And the fundamentals look like they’re holding up for now, meaning it’s possible the retreat over the last three weeks may end being a short-lived correction rather than the start of a serious downturn. The gauge of large-cap industrials is still up 13 per cent in 2026, building on last year’s 18 per cent gain.U.S. manufacturing activity grew for an eighth consecutive month in August, although the pace of expansion slowed somewhat.Yet like so much of the stock market, the ultimate fate of industrial stocks may come down to the state of the the artificial-intelligence trade that was previously an engine for the sector. Technology companies are pouring hundreds of billions of dollars into the data-centre buildout, creating demand for power generators, electrical equipment and construction machinery.This advertisement has not loaded yet.This advertisement has not loaded yet, but your article continues below.Recently, though, the AI infrastructure trade has stumbled. Concerned that capital spending on data centres may not meet sky-high hopes, traders have dumped chipmakers and power equipment names alike since early July. Public backlash to data centre construction has added to the selling pressure, Nationwide’s Mark Hackett said.Gas turbine giant GE Vernova Inc. and electrical equipment maker Eaton Corp. are down at least nine per cent since Aug. 14, making them among the biggest drags on the industrials index. Caterpillar Inc. is down five per cent.Industrial names like Caterpillar have long been considered bellwethers for the broader market, and that importance has only grown due to their connection to AI, said Matt Maley, chief market strategist at Miller Tabak.“If the weakness in this sector continues, it should send up some general warning flags for investors,” Maley said.GE Aerospace and RTX Corp. have also been some of the biggest weights on the index since its last record. Oil prices are up more than 10 per cent since mid-August, contributing to a slide in the jet-engine makers alongside fuel-hungry airlines.Freight transportation stocks have also been weak amid elevated oil prices and interest rates. Meanwhile, investors in truckers such as Knight-Swift Transportation Holdings Inc. are concerned about a drop in the prices they are able to charge customers, a worrying sign that comes just after trucking rates rebounded from a yearslong slump.“We’re basically trying to figure out, is this reversal temporary?” Citi analyst Ari Rosa said. If trucking rates end up disappointing, he said, “the implications are pretty profound for corporate earnings.”Agricultural equipment makers have been one of the few bright spots. The prices of crops such as wheat and soy are surging, which tends to put more money in farmers’ pockets that they can use to buy tractors and other equipment. That has lifted shares of Deere & Co. and its peers and drawn upgrades from analysts.For now, other industrial stocks remain at the mercy of less-rosy economic forces. Yet company-specific metrics such as margins and orders are strong, said CFRA’s Jonathan Sakraida, who thinks investors will catch a break when the next earnings season arrives.Earnings growth for the group is forecast to accelerate to almost 19 per cent for the current period, from 13 per cent in the second quarter, and top 17 per cent for all of 2027, according to analyst estimates compiled by Bloomberg Intelligence.“In the near term, there certainly is potential for more volatility on a sentiment basis,” Sakraida said. “Once we come to Q3 and really Q4 and we start getting those outlooks for 2027, we think that’s going to be superseded.”We apologize, but this video has failed to load.Notice for the Postmedia NetworkThis website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.