MW Why Wells Fargo favors industrial stocks despite new tariffs as S&P 500 stumbles

By Christine Idzelis

'We want to buy industrials here,' says Paul Christopher, head of global investment strategy at Wells Fargo investment Institute

The industrial sector is one area of the U.S. stock market that looks favorable to Wells Fargo Investment Institute after new tariffs on Canada, Mexico and China sparked a selloff in equities.

"We want to buy industrials here," Paul Christopher, head of global investment strategy at the institute, said in a phone interview Monday. If industrial stocks are selling off on Monday, he said, "good. Our clients can buy them at lower prices."

The S&P 500's industrial sector XX:SP500.20 was down 0.8% on Monday afternoon, according to FactSet data, at last check. The S&P 500 SPX, a measure of U.S. large-cap stocks, was falling around 0.5% in afternoon trading, to around 6,013.

The U.S. industrial sector should continue to benefit from secular growth trends including infrastructure spending, reshoring of manufacturing and a build-out of data centers to support the development of artificial intelligence, according to Christopher. He said a tailwind from those trends should offset negative impacts from the 25% tariffs on imports from Canada and Mexico that President Donald Trump ordered on Saturday, along with a new 10% tariff on China.

Within industrials, "it's probably going to take several quarters to have a noticeable impact," Christopher said. "You could eventually see some higher prices, but not right away."

While investors worry that tariffs will increase prices in the U.S. and hurt the country's growth, Wells Fargo Investment Institute said in a note Monday that the "latest tariffs suggest a targeted and gradual approach that also avoids derailing the domestic economy."

"Services is really the driver of the economy," said Christopher. The industrial sector hasn't had as much "pricing power" as elsewhere in the economy due to the manufacturing slump, he said.

The U.S. economy expanded at an annual rate of 2.3% in the fourth quarter of 2024, according to an estimate last week from the Bureau of Economic Analysis. The services sector is the largest component of the U.S. economy, which expanded last year even as manufacturing saw a slump.

In explaining Wells Fargo's favorable view of industrials, Christopher also pointed to "mitigating factors" such as the stronger U.S. dollar, explaining that companies would have to "give up" fewer U.S. dollars to buy goods from Canada.

The Canadian dollar has weakened relative to the U.S. dollar, falling further as traders braced for the latest tariffs, according to FactSet data.

"The market still needs to figure out where his negotiation tipping point is," Christopher said of Trump's use of tariffs. "It may be that Canada has to go into recession first."

The Wells Fargo table below shows top U.S. imports from Canada and Mexico last year from January to November, with concentration in machinery and energy.

U.S. companies in the industrial sector might seek to adjust to new tariffs by cutting deals with Canadian suppliers, who may be willing to bear some of the price increase in order to avoid losing business altogether, according to Christopher's thinking.

"We think firms will be able to manage around them," he said.

While Canada was broadly hit with 25% tariffs, Canadian oil and gas imports will be subject to a 10% tariff, according to the Wells Fargo note.

Christopher said Trump seems to be using tariffs as a negotiating tool, with the smaller tariff on Canadian oil a likely acknowledgment that "Canada is our main supplier of heavy crude."

The U.S. stock market was trading down Monday afternoon, as investors assessed the latest development in tariffs. Beyond the S&P 500, the technology-heavy Nasdaq Composite COMP was falling 0.8%, while the Dow Jones Industrial Average DJIA was slipping less than 0.1%, according to FactSet data, as last check.

Major indexes, including the S&P 500, Dow and Nasdaq, closed down on Friday as investors worried about looming tariffs. President Claudia Sheinbaum of Mexico said Monday on X that after she had a good conversation with Trump, the new tariffs would be paused for one month.

"Among the top 20 companies in the S&P 500 Index Industrials sector by market capitalization, for example, only a minority have significant exposure to supply chains from Mexico," Wells Fargo Investment Institute said in its note. "We believe that solid economic growth will drive earnings and an S&P 500 Index target" of 6,500 to 6,700 by the end of 2025.

-Christine Idzelis

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February 03, 2025 15:20 ET (20:20 GMT)

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