By Al Root

President Donald Trump's plan to upend decades of economic orthodoxy by bringing manufacturing home has economists, politicians, and investors reeling. But one thing is certain: Making more in America will provide some serious momentum for industrial stocks.

It has been a long time since the U.S. could be considered the dominant manufacturer in the world. Since 2001, when China joined the World Trade Organization, America's share of global manufacturing has dropped to 15% from 25%. Factories that made everything from wireless routers to chairs to T-shirts moved overseas as companies chased the lowest costs regardless of location. The result was good for U.S. companies and shoppers, even if it was bad for factory workers -- five million well-paying jobs disappeared -- and tough for the country, which gradually forfeited its industrial edge.

Now, the Trump administration wants to bring it all back home. If it succeeds, gone will be the cheap clothes, TVs, and tchotchkes that shoppers compulsively buy, replaced by more expensive American-made goods. At least that is the goal, according to Vice President JD Vance. "Being able to make things is good because it creates self-sufficiency as a nation, and it creates self-sufficiency in our people," he said in a speech in Michigan on March 14. "And more importantly, manufacturing jobs are good for our workers."

Change is never easy, especially when it aims to remake an economy that has been the envy of the rest of the world. Today, much of the manufacturing expertise is located overseas -- chips in Taiwan, lithium-ion batteries in China, robots in Japan. The tool of choice, tariffs, will raise prices for U.S. shoppers, reduce consumption, and slow growth. The levies will also raise the cost of production for companies while reducing profit margins. Their chaotic implementation hasn't helped, and it threatens to bring the economy to a full stop if companies and shoppers become paralyzed by uncertainty.

But investors shouldn't let a possible policy-induced recession distract them from the looming renaissance in U.S. manufacturing. The changes being wrought -- changes that began during the first Trump administration and continued through the Covid pandemic, when companies experienced the downside of overly extended supply chains -- will lead to more factories and require more power, automation, and artificial intelligence to run them. Ultimately, shares of companies that can bring this vision to life, such as Eaton, GE Vernova, and Rockwell Automation, will benefit.

"For 20 years, the thesis was that we can live in an asset-light world. Then, all of a sudden, it turns out that to make all these things...we need assets," says BofA Securities analyst Andrew Obin. "Industrials are going to be a very good place."

Rebuilding America's industrial capacity won't come cheap. Construction spending for manufacturing facilities grew 20% in 2024 to $232 billion, up threefold from 2019. BofA expects "high-single-digit growth" in 2025, driven by " megaprojects" -- those with budgets north of a billion dollars. At the end of 2024, electrical-equipment maker Eaton put its North American backlog at $1.9 trillion, up 33% year over year. Ground was broken on just 15% of the projects, with a record number of starts expected in 2025. Companies that benefit from a building boom include Caterpillar, which makes construction equipment, and Aecom, which builds the plants.

The factories of the future won't resemble those from the 1950s -- it would cost too much. A U.S. manufacturing worker makes about $30 dollars versus $3 an hour for a Mexican one. Nor are there Americans to fill all the jobs. McKinsey partner Liz Hempel says there is a shortage of 1.9 million manufacturing workers in the U.S., a gap that will have to be filled by robots. "Automation has to be part of the discussion," she says.

All those factories will need power, too. U.S. electricity consumption was stagnant from 2000 to 2020, growing less than 0.3% a year on average. Then came electric vehicles, which shifted demand from the pump to the socket, heat pumps that use electricity to manage home temperatures instead of burning heating oil or natural gas, and power-hungry AI data centers, which could consume 12% of U.S. electricity by 2028. Since 2020, electricity demand has grown almost 2% a year and should exceed that every year for the rest of the decade. That should be a boon to companies along the power-line value chain, including Quanta Services, Prysmian, and Schneider Electric.

In the short term, worries about the strength of the U.S. economy could overwhelm these tailwinds. After all, the industrial economy has struggled over the past two years, even with electrification, reshoring, and automation. The Institute for Supply Management Purchasing Managers' Index was below 50, indicating shrinking activity, for 26 consecutive months heading into 2025, before shifting to growth with two 50-plus readings in January and February. Now, tariffs and other policy uncertainties threaten to end the recovery just as it begins. It's still possible that a slowdown, if one occurs, will be short-lived. The manufacturing sector could prosper thanks to the shift in government focus even as other parts of the economy struggle.

Exchange-traded funds that track the industrial sector would be one way to bet on an American manufacturing renaissance, though none is perfect. The $1.6 billion iShares U.S. Industrials ETF, for instance, holds 191 stocks, but its two largest positions are Visa and Mastercard. The $3.1 billion First Trust RBA American Industrial Renaissance ETF holds 52 small- and mid-cap stocks, including RBC Bearings and MasTec, but misses out on the larger stocks. Launched in 2024, the iShares U.S. Manufacturing ETF, with its large stakes in Deere and Honeywell International as well auto makers -- which are technically consumer-discretionary companies -- such as General Motors, better reflects the theme. Unfortunately, it has less than $13 million in assets under management, which might be too small for most investors.

Ultimately, the $20 billion Industrial Select Sector SPDR ETF, which offers market-weighted exposure to the group, or the $5.3 billion Vanguard Industrials ETF, which tracks the industrial stocks in the MSCI US index and includes everything from microcaps to large-caps, could be the best bet.

Five individual stocks stand out for their exposure to America's manufacturing renaissance. In construction, there's CRH, which has turned itself into one of the world's largest building-materials and construction companies. It produces aggregates -- stone used to make concrete -- as well as cement, asphalt, and other construction-related products, and builds roads and infrastructure. Though it's based in Dublin, it gets 61% of its revenue from the U.S. Its vertically integrated business model "enables the company to profit from the entire value chain," says Truist Securities analyst Keith Hughes.

Hughes rates shares a Buy and has a $120 price target for the stock, up 22% from a recent $98.76. His price target values CRH shares at about 12 times estimated earnings before interest, taxes, depreciation, and amortization, or Ebitda, which doesn't look expensive considering the company has grown that metric by about 10% a year on average for the past five years. Growth should continue due to a combination of industry strength and targeted acquisitions; CRH has completed more than 800 acquisitions.

The automation of factories will benefit Rockwell Automation, a Milwaukee-based specialist in the automation and digital transformation of manufacturing processes. Rockwell stock hasn't kept pace with the broader market over the past few years, as earnings growth stagnated as manufacturing slowed. But profits look set to accelerate again. The company beat earnings forecasts when it reported fiscal first-quarter results in February, leading Oppenheimer analyst Noah Kaye to observe that demand is "inflecting."

Wall Street seems to agree: It is projecting average annual earnings growth of about 17% for the coming two years. Those numbers could be even better if "demand for automation begins to outpace the broader economy again," writes Kaye, who has a $320 price target on Rockwell, up 23% from a recent $260.03.

Like Rockwell, Ametek, which makes a broad range of electronic instruments and electromechanical devices for a host of industries, is also a beneficiary of automation. The company is expected to grow earnings at about 10% a year on average for the next few years, and with an added boost from improving U.S. manufacturing, growth could be faster than expected. That makes the stock worth a look even at 25 times 2025 earnings estimates, a premium to the S&P 500 index's 21 times. " Ametek is a good management team with broad exposure to capital spending trends, " says Obin, who has a Buy rating and a $225 price target on the stock, up 27% from recent levels.

GE Vernova, which builds turbines, wind generators, and other products needed to produce and distribute electricity, should benefit as power demand grows. The stock has dropped 20% since Jan. 27, when China's DeepSeek caused all stocks related to the AI trade to tumble on concerns that the technology didn't have to be quite so power-hungry.

The selloff looks like an opportunity. Shares trade for about 27 times estimated 2026 earnings before Ebitda, more expensive than the typical industrial stocks in the S&P 500, which trade for closer to 15 times 2026 Ebitda. GE Vernova, however, is expected to grow its Ebitda by almost 50% between 2025 and 2026. That number for industrial companies in the S&P 500 is closer to 10%.

BofA's Obin points out that before GE ran into serious trouble a few years ago, Wall Street valued its power assets at about $80 billion. Stock volatility and multiples aside, investors have bid Vernova back close to those levels. He sees more upside given rising demand, rating shares Buy with a $485 price target for the stock, up 44% from a recent $335.80.

Like GE Vernova, Eaton benefits directly from accelerating demand for electricity . But rather than making the turbines that turn natural gas into electricity, it makes the hardware and software that help electricity move from a regional substation to a home, factory, or data center. Its shares have dropped 21% since peaking at $371 in January on those same DeepSeek fears.

It looks like a dip to buy. At an analyst and investor day in March, Eaton said it plans to grow sales by 6% to 9% annually until 2030 while expanding profit margins by about four percentage points, from almost 20% in 2024. That adds up to earnings growth of greater than 12% annually, with additional upside from mergers and acquisitions. After the event, KeyBanc analyst Jeffrey Hammond upgraded Eaton stock to Buy from Hold and established a $340 price target, up 15% from a recent $294.56.

It pays to stick with solid businesses. Eaton shares have returned 19% a year for the past 10 years, six percentage points better than the S&P 500. It's one stock that doesn't need to be made great again. It's already there.

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

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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March 20, 2025 01:30 ET (05:30 GMT)

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