What Industrial Stocks Say About the Market’s Selloff

A Rocket Lab Electron rocket. (Courtesy RocketLab)

Key Points

• Industrial shares, strong this year, lost about one percentage point of outperformance compared to the S&P 500 from the end of last week through Thursday.
• Karman and Rocket Lab, two expensive, high-growth stocks, saw declines of 15% and 12% respectively, this week .
• The market is experiencing a rotation from high-flying shares to value names. Some utilities tied to AI are also seeing drops.

What investors are selling as the stock market slides shows, to some extent, what is going through their minds.

Industrial shares are sending a message. Coming into the week, the shares had been strong. The Vanguard Industrials ETF and Industrial Select Sector SPDR ETF were up about 16% year to date, two percentage points ahead of the S&P 500 .

As of the close on Thursday, those ETFs had given up about one percentage point of outperformance. Most of the pain, however, was limited to a specific type of stock.

Expensive, highflying shares took it on the chin. Investors decided to take profits and move into some value names, stocks that might not grow as fast, but often trade for often below-market price/earnings ratios.

Barron’s looked at the roughly 200 largest industrial, materials, and utility stocks in the U.S. The quintile performing worst this week was down about 6%, on average. The best 20% have actually gained 3%.

Entering the week, the worst quintile was up an average of 17% year to date, trading for about 29 times the earnings expected over the coming 12 months. That is 50% more expensive than the best 20% of shares, which trade for less than 20 times and were down about 4% year to date on average.

It isn’t all a move out of stocks that stand to benefit from artificial intelligence. Take Karman and Rocket Lab shares, two players in aerospace and defense.

Both shares entered the week with triple-digit year-to-date gains, though Karman has only been publicly traded since an initial public offering in February. Coming into Friday trading, Karman stock was down 15% for the week. Rocket Lab shares plunged 12%.

The point to note is that the aerospace trade doesn’t look dead. Shares of TransDigm and Honeywell were up for the week. Both stocks have underperformed the likes of Karman, and both are cheaper. Karman’s price-to-earnings ratio is north of 100 times the earnings expected over the coming 12 months, while Honeywell is at about 19 times.

Of course, AI drives a lot of stock market activity, and Nvidia shares, entering Friday trading, were down 4% for the week. That has shown up in selling pressure, too. Shares of Constellation Energy and Talen Energy, two utilities tied to powering AI data centers, were down 6% and 8% entering Friday trading, respectively.

Investors can take a few lessons away from recent trading. For starters, beta—how dramatically a stock moves relative to the overall market—cuts both ways. High-flying stocks, which are great in up markets, tend to get hit harder in down markets.

This time around, the selling doesn’t feel contained to one sector. It doesn’t appear that downbeat forecasts from a company have shaken confidence in one part of the economy.

For now, it looks like a more garden-variety stock market rotation, where people get a little nervous and start to sell the highest-flying shares, taking profits in hopes of buying again later when shares are less expensive. The cash they raise can go into value, as seems to be happening now, or into haven assets.

Down markets are unavoidable, testing investors’ nerves, and demonstrating the need for a consistent process. All investors can do is pay close attention, try not to overreact, and stick to whatever process has led them to gains in the past.