Strengthening credit quality and Biden's massive infrastructure plan is setting industrial stocks up for further big gains

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Strengthening credit quality and Biden's massive infrastructure plan is setting industrial stocks up for further big gains
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  • The outlook for credit for industrial companies reached its best level in 15 months in March.
  • Industrial stocks have been gaining on economic growth prospects and an infrastructure bill in the pipeline.
  • The S&P Industrials sector has gained about 8% this year.
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The strongest credit outlook for US industrial companies in more than a year and work in Washington on an infrastructure bill should support further stock gains for the sector.

A forward-looking index of credit opinions for industrial companies in March rose to its highest level in 15 months, with improved conditions arriving as shares of industrial firms, as a whole, have outpaced other sectors this year.

The Credit Consensus Indicators index came in at 50.6 in March, the best level since December 2019, said Credit Benchmark, which monitors internal credit risk views from more than 40 global financial institutions. The index in February was at 48.7 and readings below 50 indicate deterioration in credit quality.

The brighter credit outlook was supported by expansion in the US economy since it slumped into recession in 2020 as the COVID-19 crisis ramped up. The Commerce Department on Thursday upwardly revised its estimate of fourth-quarter 2020 growth to 4.3% from 4.1%.

For March credit readings, the "real standout this month is the US," said Credit Benchmark in a note Thursday. "There may be also be growing optimism for the UK and EU, whose CCI scores inched closer to 50, although the EU's economy isn't as strong as the US' and it has had struggles with vaccinations."

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Economists have said the vaccination of millions of Americans from the coronavirus crisis and fiscal stimulus packages passed in Washington - including the massive $1.9 trillion bill greenlighted in March - are key factors driving the recovery. But supply chain issues could also temper expectations in the industrial space, said Credit Benchmark.

Cyclical stocks have risen this year as investors position themselves with beneficiaries of economic growth. The S&P 500 Industrial Sector has gained about 8% so far this year, but lags behind the 13% rise for the financials sector.

President Joe Biden is expected next week to introduce his plans to bolster infrastructure spending in the country. The proposal could be worth up to $3 trillion and include focuses on roads and bridges.

Among exchange-traded funds in the industrial space, the Industrial Select Sector SPDR Fund and the Fidelity MSCI Industrials Index ETF have each gained about 9% during 2021.

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