Despite the US economy showing resilience with strong GDP growth, manufacturing stocks have lagged behind broader market indices, but analysts believe the sector is poised for a turnaround in 2025.
In 2024, the Industrial Select Sector SPDR ETF (XLI), which tracks the sector, delivered a return of 17%, falling short of the S&P 500’s impressive 25% gain.
Manufacturing activity has struggled, contracting in 11 out of 12 months last year, according to the Institute for Supply Management’s (ISM) Purchasing Managers Index (PMI).
December’s PMI reading of 49.3, although higher than November’s 48.4, remained below the 50-point threshold that signifies expansion.
However, many factors point towards the manufacturing sector getting back on track in 2025.
Optimism over the health of the US economy: a key factor
One of the key factors fuelling optimism is the overall health of the US economy.
Wolfe Research analyst Chris Senyek notes that real GDP growth is projected to reach 2.5% in 2025, underpinned by strong consumer spending and a robust labor market which received a further boost on Friday with the latest jobs report.
While short-term interest rates are unlikely to decline sharply, financial conditions are expected to loosen compared to the previous two years.
Excess inventory, a lingering issue from COVID-era disruptions, is steadily being worked down.
This normalization in supply chains is expected to pave the way for more balanced manufacturing activity. In a recent report, Senyek said,
We expect more balanced goods inventory levels in the economy, solid 2.5% U.S. real GDP growth, and loose financial conditions to push the [PMI] index sustainably over 50 in 2025.
Supply chain shifts boost domestic manufacturing
The Covid-19 pandemic fundamentally altered how companies view global supply chains.
Many businesses, once committed to global sourcing, are now prioritizing local production to avoid disruptions and geopolitical risks.
This shift has spurred a wave of domestic investment, particularly in construction and manufacturing projects.
Source: Barron’s
David Wagner, a portfolio manager at Fidelity, highlighted this trend in his 2025 outlook,
The value of projects announced since 2020 is roughly $1.9 trillion, and only about one-quarter of these have entered the construction phase, which implies that the majority of this work may still lie ahead.
Short-cycle stocks take the spotlight
As manufacturing recovers, analysts expect short-cycle stocks—those that produce parts and components frequently reordered—to outperform.
These companies are better positioned to capitalize on an upswing in manufacturing activity compared to firms reliant on large-ticket durable goods.
Notable examples include:
3M (MMM): Known for both consumer and industrial products, 3M saw a 51% gain in 2024, thanks to improved margins and a management overhaul.
With a price-to-earnings (P/E) ratio of 17 for 2025, the stock remains attractively priced relative to the S&P 500.
Parker Hannifin (PH): Specializing in components for engines and aircraft, Parker Hannifin gained 39% last year.
Its 30-year track record of free cash flow growth and exposure to post-Covid air travel make it a reliable choice.
Stanley Black & Decker (SWK): Though down 15% in 2024, the stock is on analysts’ radar following a management focus on operational transformation.
Mizuho’s Brett Linzey recently upgraded it to Outperform, highlighting its turnaround potential.
Other stocks include Lennox International, Dover Corporation, Regal Rexnord, Illinois Tool Works as well as Rockwell Automation.
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