Caterpillar, Honeywell, and Industrial Stocks Are Breaking Down. What’s Next.

Industrial stocks have taken a major hit recently. The concern is the economy—and the shares are now trading at scary levels.

The Industrial Select Sector SPDR exchange-traded fund (XLI), home to large manufacturers such as Honeywell International (HON) and logistics firms FedEx (FDX) and United Parcel Service (UPS), is trading at about $97, down 12% from an early August record of just over $110.

They’ve dropped because the market knows the Federal Reserve must—as the bank has indicated—keep interest rates high for a while in order to cool down inflation and the economy. Eventually, that will hurt demand and limit companies’ spending on large equipment needed to build products, while waning consumer demand will hurt airlines and transport companies.

One sign that sentiment in these stocks has thoroughly broken down is that not even better-than-expected profits can lift the shares. Caterpillar (CAT) beat sales and earnings estimates Tuesday, but buyers haven’t stepped in. Shares are actually in the red in midday Tuesday trading, and are now down 20% from record highs set in early August.

Yet this is understandable. Caterpillar shares, like other industrial names, came into earnings up by a double-digit percentage for the past year, already reflecting the strong demand. To make matters worse, the company said its order backlog shrunk almost $2 billion year over year, which indicates waning demand for machines going forward.

Newsletter Sign-up It’s the type of story that’s laid the industrials ETF low. It had taken several tries over the past few years for buyers to finally come in at around $105—and they did early this summer—to lift shares. Now, selling pressure is keeping the ETF below that level. The delayed damage to the economy from higher rates is starting to show up in forward-looking indicators in companies’ earnings releases.

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