Something strange has been happening in the markets... a disconnect of sorts.

The S&P 500 is up 14% this year. We're officially in a bull market. Almost all of this rally is being driven by tech.

The Technology Select Sector SPDR Fund (XLK) has soared 37% so far in 2023. Big Tech names like Apple (AAPL), Microsoft (MSFT), and Nvidia (NVDA) are leading the charge. They're all up at least 40% this year.

And yet, despite the artificial-intelligence ("AI") bump, most of the tech sector isn't doing that well. Plenty of well-known companies like e-commerce giant Shopify (SHOP) are still laying off employees.

On the other hand, the Industrial Select Sector SPDR Fund (XLI) is only about 6% higher over the same time. It's lagging the broader market. Investors are losing faith in the industrial sector... even as the data shows that it's doing just fine.

Inflation has stayed higher for longer. Investors have just stopped believing in the economy. And as we'll cover today, that's causing them to miss out on a strong corner of the market.

Industrials are having a great year...

We've been bullish on this sector since the supply-chain supercycle started ramping up. Regular readers know that's our term for the wave of U.S. infrastructure spending as production comes back home.

And our opinion hasn't changed...

A key gauge of industrial health in the U.S. is total construction spending on manufacturing. It includes projects like new buildings and renovations in both private (homes and businesses) and public (highways, schools, and water supply) construction.

Construction and manufacturing spending tells us if there's demand for blue-collar workers. If more money is being spent on projects, more of these folks are needed. That's good for the economy.

It also gives us insight into what types of projects are being worked on... and where money is being allocated.

For example, last November, President Joe Biden designated $1.2 trillion for new and existing U.S. infrastructure. That massive amount of spending tells us U.S. construction isn't going anywhere.

We've also talked a lot about recent struggles in commercial real estate ("CRE"), which are helping to drive the coming recession. CRE firms are being forced to give up old buildings... and construction companies will likely be a big part of revamping or replacing them.

Construction spending has skyrocketed since the start of 2022...

However, there's a clear disconnect between what the market thinks and what's actually happening in the industrial sector.

As we said, construction stocks are only up about 6% this year. Meanwhile, manufacturing and construction spending has ballooned more than 36%.

Take a look...

The boost in spending is a sign that the supply-chain supercycle is still underway. Industrial stocks' lagging performance tells us this trend just isn't being recognized like it should.

Investors are focusing on factors like high interest rates and continued inflation. They're not looking at what's happening on a day-to-day basis in this space. It's only a matter of time before they start to recognize what's really happening.

Just because tech is driving the market today doesn't guarantee it's going to power the next bull market. Industrials are still set up to do well.

There are still plenty of opportunities for industrial companies to grow and outperform going forward.


Joel Litman
June 26, 2023