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Manufacturing Activity Poised for Rebound in 2024: 5 Picks

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The manufacturing sector has been one of the worst sufferers this year as higher interest rates have been drying up orders. However, the situation appears to be improving lately as inflation continues to ease, and the Federal Reserve is now considering ending its monetary tightening campaign.

This has led to a slow but steady improvement in manufacturing activity lately. Durable goods orders and industrial production have been increasing, and a rate cut in 2024 is likely to further bolster manufacturing activity in 2024.

Durable Goods Orders Increase

The Commerce Department's Census Bureau said on Dec 22 that orders for long-lasting U.S.-manufactured goods, or durable goods, surged 5.4% in November, surpassing estimates of a jump of 2.2%. This follows a 5.1% decline in orders for durable goods in October.

Year over year, durable goods orders increased 4.5%.

November’s jump was driven by a solid rebound in orders for transportation equipment, which surged 15.3% after plummeting 13.4% in October. Orders for motor vehicles and parts grew 2.8% in November as strikes by United Auto Workers came to an end.

Also, orders for non-defense aircraft soared a whopping 80.1%. Besides orders for appliances and components, electrical equipment and machinery and computer and electronic products increased.

The solid gains in November orders follow a 0.2% month-over-month jump in November, while manufacturing output increased 0.3%. Capacity utilization edged up 0.1% in November.

Although inflation has been declining sharply, activity in the manufacturing sector, which accounts for 10.3% of the economy, hasn’t been growing that fast.

The U.S. GDP grew at a pace of 4.9% in the third quarter, which speaks volumes about the underlying strength of the economy.

Inflation, too, has declined sharply from its peak of 9.1% in June 2022 as the Fed steeply raised interest rates by 525 basis points since March 2022.

Easing inflation saw the Fed leaving interest rates unchanged in its last three policy meetings. The steady gains in November came as a result of easing price pressures and the manufacturing sector is expected to gain from here as the Federal Reserve has hinted at ending its monetary tightening campaign soon.

Also, the Federal Reserve is expected to go for at least three 25 basis point rate cuts in 2024, which is expected to boost manufacturing activity as lower interest rates are likely to drive orders.

Our Choices

Given this scenario, it would be ideal to invest in five stocks such as Eaton Corporation plc (ETN - Free Report) , A. O. Smith Corporation (AOS - Free Report) , Xylem Inc. (XYL - Free Report) , Graham Corporation (GHM - Free Report) and Applied Industrial Technologies, Inc. (AIT - Free Report) ,which we have detailed below. These stocks have a Zacks Rank #1 (Strong Buy) or 2 (Buy) and assure good returns. You can see the complete list of today’s Zacks #1 Rank stocks here.

Eaton Corporation plc is a diversified power management company and a global technology leader in electrical components and systems. ETN sells products in more than 175 countries and has 92,000 employees.

Eaton’s expected earnings growth for next year is 10.6%. The Zacks Consensus Estimate for current-year earnings has improved 2.4% over the last 60 days. ETN presently carries a Zacks Rank #2.

A. O. Smith Corporation is one of the leading manufacturers of commercial and residential water heating equipment and water treatment products in the world. AOS specializes in offering innovative and energy-efficient solutions and products, which are developed and sold on a global platform.

A. O. Smith’s expected earnings growth for next year is 5.8%. The Zacks Consensus Estimate for current-year earnings has improved 4.7% over the last 60 days. AOS currently carries a Zacks Rank #2.

Xylem Inc. is one of the leading providers of water solutions worldwide. XYL is involved in the full water-process cycle, including the collection, distribution and return of water to the environment. Xylem has a significant presence in the United States, the Asia Pacific, Europe and various other nations.

Xylem’s expected earnings growth for next year is 8.5%. The Zacks Consensus Estimate for current-year earnings has improved 3% over the last 60 days. XYL currently carries a Zacks Rank #2.

Graham Corporation designs and builds vacuum and heat transfer equipment for process industries and energy markets worldwide. GHM’s products include steam jet ejector vacuum systems and liquid ring vacuum pumps, surface condensers, Heliflows, water heaters and various types of heat exchangers.

Graham Corporation’s expected earnings growth for next year is 3.2%. The Zacks Consensus Estimate for current-year earnings has improved 106.7% over the past 60 days. GHM presently sports a Zacks Rank #1.

Applied Industrial Technologies, Inc. is a distributor of value-added industrial products — including engineered fluid power components, bearings, specialty flow control solutions, power transmission products and miscellaneous industrial supplies. AIT’s products are mainly sold to original equipment manufacturers and maintenance, repair, and operations customers in Australia, North America, Singapore and New Zealand.

Applied Industrial Technologies’ expected earnings growth for the current year is 1%. The Zacks Consensus Estimate for current-year earnings has improved 3.2% over the past 60 days. AIT currently has a Zacks Rank #2.

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