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Goldman Sachs Group is recommending that their clients shun industrials stocks despite the sector’s stellar 18% rally since the start of the fourth quarter, according to a recent note from David Kostin, the investment bank’s top equity strategist.

Kostin reiterated his underweight rating on the industrials sector in a note to clients dated Dec. 16. In the note, he argued that investors are too optimistic about how China’s economic reopening and federal support for certain large capital projects might impact the sector, among other factors.

“Optimism around China reopening as well as typical patterns of sector outperformance at this stage of the cycle help to explain why Industrials stocks are rallying but fall short of explaining the magnitude of outperformance,” Kostin said.

Goldman has maintained its underweight rating on industrials since at least October, meaning clients who took the bank’s advice would have missed out on much of the sector’s outperformance since then. Kostin and representatives for Goldman didn’t respond to a request to comment from MarketWatch.

Kostin’s call is based in part on the expectation that industrial firms’ profits might stagnate or shrink next year, an outlook that is at odds with Wall Street’s generally more optimistic outlook for the sector.

“Elevated valuations and our below consensus forecasts for Industrials earnings and margins anchor our underweight recommendation,” Kostin said in the note.


Since the start of October, industrials have racked up the best performance out of the S&P 500’s 11 sectors. As of midday Monday, the sector had risen more than 18%, compared with a 6.7% gain for the S&P 500.

Companies included in the industrials sector are primarily focused on building heavy machinery like aerospace and defensive equipment, according to a definition from S&P Dow Jones Indices. It also includes firms involved in transporting goods and people, like airlines, freight railways and trucking, as well as companies that provide commercial and professional services to these types of firms.

Some of the largest industrials firms by market capitalization are United Parcel Service Inc.
Raytheon Technologies Corporation
Honeywell International Inc.
Boeing Company

and General Electric Co.
according to FactSet data.

Investors can also gain exposure to the sector via equity exchange-traded funds like the Industrial Select Sector SPDR Fund

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