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Will Tax Reform Boost the Industrial Sector?

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Mike Wilson on industrial sector

Morgan Stanley’s (MS) Mike Wilson shared his views on the industrial sector (XLI) in a recent interview. His firm is currently overweight in the sector. Wilson believes the financial (XLF), industrial (XLI), and technology (XLK) sectors will see a huge benefit from proposed tax reforms. The industrial sector makes up 10.2% of the S&P 500 Index (SPY), while the financial sector accounts for 14.1% and the technology sector accounts for 22.5% of SPY.

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Wilson said that global (ACWI) economic recovery is an important factor that’s helping industrial stocks. The operating margins are improving broadly, which is indicating synchronized global growth. Increasing manufacturing PMI and services PMI are improving confidence in the industrial sector. Wilson also believes that capital expenditure will increase dramatically and that Trump’s proposed fiscal stimulus could help the sector.

Mike Wilson also said in the interview that both tax reforms and tax cuts could have a significant impact on the industrial sector. The potential improvement in companies’ net profit through tax reforms could increase companies’ capital expenditure.

Performance of the industrial sector ETF

The Industrial Select Sector SPDR ETF (XLI), which tracks the performance of the industrial sector, rose nearly 6.4% on a year-to-date basis as of May 19, 2017. The broader market S&P 500 Index (SPY) returned nearly 6% during the same period. The ETF returned nearly 19% over the past year. The ETF is trading nearly 2.4% above its 100-day moving average and 0.8% above its 20-day moving average.

You may be interested to read Gundlach to Investors: Long Emerging Market, Short S&P 500.

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