Industrial Earnings Offer Hope That the Economy Isn’t in a Recession

The industrial sector is an important bellwether for the U.S. economy, because making things also drives demand for services and goods in the rest of the economy. While many Wall Street strategists have predicted a recession at some point in 2023, industrial results offer some hope that the economy might not suffer as much as feared.

So far, about 70% of the almost 90 industrial stocks in the
Russell 1000
have reported quarterly numbers. On average, earnings have come in about 5% better than analysts predicted, while sales have beaten estimates by about 2% on average. Those numbers exclude two extreme outliers:
Boeing
(BA) and its supplier,
Spirit AeroSystems
(SPR).

The latest to release results were U.S. industrial giants
Emerson Electric
and
Eaton
on Wednesday. While their stocks headed in opposite directions after their earnings reports, both companies offered solid outlooks for this year.

Eaton, an electrical components maker, reported adjusted earnings of $2.06 a share from sales of $5.4 billion for the fourth quarter. Wall Street was looking for $2.05 a share from sales of $5.3 billion.

Looking ahead, the company expects to earn about $8.24 a share in 2023, which is a few cents better than Wall Street projects. Eaton stock rose 2.7% during Wednesday’s session.

Automation systems supplier Emerson (EMR) posted fiscal first-quarter earnings of 78 cents a share from just under $3.4 billion in sales. Wall Street was looking for 87 cents a share from just more than $3.4 billion in sales for the December quarter.

Included in the earnings figure was a 9-cent charge for stock-based compensation. Still, it looked like a miss, and shares dived 5.7% on Wednesday. The
S&P 500
and
Dow Jones Industrial Average
slipped 1.1% and 0.6%, respectively.

Emerson did, however, increase its base full-year guidance. It now expects to earn about $3.63 a share, up from prior guidance of about $3.59 a share. On an adjusted basis, the company expects to earn about $4.08 a share, close to Street projections. That guidance was unchanged as Emerson adjusted other factors, such as restructuring spending.

RBC analyst Deane Dray called Emerson’s quarter “noisy,” but was encouraged by the earnings outlook.

These results are relative to expectations, but absolute numbers for industrial companies look solid, too. On average, quarterly earnings are up about 20% year over year for the Russell 1000 industrials that have reported so far. Sales are up about 8%. Those figures also exclude
Boeing
and Spirit.

Results at the commercial aerospace giant Boeing have been volatile since the dual problems of the Covid-19 pandemic and the grounding of its 737 MAX jet. Boeing’s reported earnings have missed Wall Street estimates in 12 of the past 15 quarters. For the fourth quarter, Boeing reported a loss of $1.75 a share; Wall Street had expected a profit of 17 cents a share.

Spirit AeroSystems
generates about 75% of its sales from Boeing. It has been equally hard for analysts to predict results for that company.

Investors seem to be pleased with industrials’ results as well. Sector stocks have risen 2%, on average, after earnings. That’s a sign that investors are happy with outlooks—or that guidance is, at least, better than feared.

Dray, in a preview report published in December, called the industrial stocks he covered “an oasis of earnings” for the first half of 2023. He expected sales and earnings to be fine for a few quarters.

He looks right. “Healthy demand, record backlogs, carryover pricing benefits, and secular tailwinds has led to 70% of our coverage posting [fourth-quarter] operating beats thus far,” Dray wrote earlier this week.

Now investors have to hope all that will continue.

Write to Al Root at allen.root@dowjones.com