With the US presidential election mere days away, manufacturers brace for potential policy shifts that could reshape the industry’s trajectory for years.
While they’re on track for one of their best years, many firms remain cautious about the unknowns, particularly around trade policies under potential Trump tariffs.
A Democratic win, on the other hand, might maintain the status quo.
For now, industrial stocks in the Russell 1000, excluding Boeing, are up by about 22% in 2024, closely mirroring the S&P 500’s rise.
They trade for about 25 times estimated 2025 earnings, a premium to the market’s 21 times multiple.
“Demand remains subdued, as companies showed an unwillingness to invest in capital and inventory due to federal monetary policy…and election uncertainty,” said Timothy Fiore, chairman of the Institute for Supply Management’s (ISM) PMI survey in their October report, as reported by Barron’s.
AI and aerospace demand expected to hold steady
Manufacturers this year have benefitted from substantial spending on electrification and artificial intelligence infrastructure.
As major tech companies pour billions into AI data centers, demand for equipment has surged, and so needs airplane parts and new jets, propelling growth for aerospace suppliers.
Despite broader industrial sluggishness, the AI and aerospace demand are expected to hold steady into 2025.
However, Boeing has had a rocky year. Its stock has dropped by around 41% year-to-date, in contrast with broader industry gains, as production and quality issues persist, coupled with a strike by its machinist union.
While demand remains high, the company faces its own set of hurdles, including added regulatory scrutiny and production constraints.
Potential tariff changes could spark trade war
Should Donald Trump win the election, his plans for tariff increases could present new challenges.
His strategy to bring more manufacturing back to the US through tariffs may seem beneficial on the surface.
However, increased tariffs often spark retaliation, and a new trade war could impact some of America’s biggest manufacturers, particularly in the aerospace industry.
China, for instance, is a major customer of Boeing, with around 200 Boeing 737 jets operated by China Southern Airlines.
But Beijing might halt future Boeing orders if fresh tariffs hit US-China relations.
Tariffs levied against European manufacturers too could impact Boeing which does not make planes in Europe.
Airbus, which manufactures jets in Mobile, Alabama, could benefit due to its US-based operations, giving it a potential edge in such a scenario.
Suppliers like GE Aerospace, who serve both Airbus and Boeing, may be less affected directly by the tariffs, though they too wish to avoid disruptions tied to Boeing’s production and geopolitical uncertainties.
Reshoring brings jobs, but industrial momentum remains weak
Efforts to boost US manufacturing through tariffs and government policies have delivered results over the past few years.
Since Trump’s first term, employment in the sector has risen as companies ramped up domestic production of semiconductors, batteries, and automobiles.
US manufacturing employment grew from 12.4 million workers at the end of 2016 to 12.9 million by September 2024, marking consistent growth through both the Trump and Biden administrations.
But reshoring alone hasn’t solved the sector’s bigger challenges.
This limitation is reflected in the performance of major players like Rockwell Automation and Honeywell which have trailed the S&P 500 in performance over the past two years, with average returns of only 8%.
Additionally, the ISM’s monthly PMI index, which indicates manufacturing growth, has been above 50 only once in the past two years, highlighting a deep industrial weakness.
Lower interest rates to be a short-term tailwind
The election may resolve some uncertainties, but manufacturers remain cautious.
However, one tailwind could come in the form of lower interest rates expected in 2025, which are likely to help boost capital expenditure and order momentum across the industry.
“Order momentum is expected to accelerate in late 2024 and into 2025 following the US election and interest rate cuts given historically elevated capacity utilization rates across durable goods manufacturing,” wrote Jefferies analyst Saree Boroditsky in a recent report.
As manufacturers prepare for a new year, they’re hopeful for policy stability and continued support from interest rate cuts.
But all eyes are on the election results, knowing they could either propel or hinder growth depending on the outcome.
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