History says the surprising S&P 500 stocks that led market to record, and the Dow, have room to run

The market is hyper-focused on the group of big tech stocks that now dominate the S&P 500, especially as Apple recently eclipsed the $2 trillion valuation mark and these technology companies come to represent as much as 20% of the index. But it was not the tech sector which posted the biggest returns as the market was running towards its new all-time record level notched last week.

In fact, it was a sector that speaks more to the 20th century than the 21st century which had a double-digit percentage gain in the one-month trading window leading into last week’s record: industrials. The S&P 500 Industrials led all sectors higher in the month of trading ended August 14, gaining well over 10%, and doubling the gain in the broad S&P 500 Index.

According to recent market history, the rally could continue, benefitting not just the old-school, blue-chip stocks in the industrials sector, but the broader market and Dow Jones Industrial Average.  

Since 2010, the Industrials Select Sector SPDR ETF, also known by its ticker symbol XLI, has gained 10% or more in a one-month period on 10 other occasions. Following those gains, the trend tends to continue, with the XLI adding another 2.25% in the two weeks that follow, and trading positively 90% of the time. In the one-month period after the big gains for XLI, similar performance continues, with industrial stocks up 2.32%.

Among the components that led the sector higher: United Parcel Service soared over 40%; FedEx gained over 30%; and Cummins tacked on more than 20%.

The Dow is also a consistent winner in these periods, also a positive trade 90% of the time in the two-weeks that follow, adding an average of 1.6%, and higher by 1.82%, on average, one month later.

Among the catalysts for industrials big move: investors rotating out of tech growth stocks and more attractive valuations in the industrials sector, according to Michael Bapis, managing director of Vios Advisors at Rockefeller Capital Management.

“You’re going to start to see a rotation from the growth names, the high-flying growth names, into some more value, safe haven names,” Bapis recently told CNBC’s “Trading Nation.” 

Matt Maley, chief equity strategist at Miller Tabak, advised investors to be careful considering the extent of the run. “It’s been almost a parabolic move,” he told Trading Nation.

Recent earnings from UPS in late July were stronger than expected at the coronavirus outbreak led to a boom in home deliveries and consumer shipments up 65.2%, the company reported. “Our results were better than we expected, driven in part by the changes in demand that emerged from the pandemic,” said UPS Chief Executive Carol Tomé said on earnings day.

UPS has even taken to tacking on additional fees for delivery given then surge caused by Covid-19.

Citi recently laid out a bullish case for peer FedEx tied to coronavirus, but another rationale: it said that the need to deliver hundreds of millions of vaccine doses implied “‘stars aligning” for shares of the company.

But the weaker global economy has hit bellwethers in the sector like Caterpillar, which reported a 31% revenue decline in late July. Still, the results were better than expected and shares shot up in the week after the earnings.

Last Friday, Caterpillar competitor Deere rose after posting better-than-expected results.

Even “humbled” Boeing has shown signs of life, picking up its first new 737 Max order since last November, though its stock has not been among the industrial leaders in recent trading, going sideways in the past month.

In a sign of the uncertainty that lingers, some big industrials have been shy during this earnings season about offering financial guidance, including Cummins. “While customer demand did improve in some regions as the quarter progressed, significant uncertainty around the pace of recovery in our markets remains,” the company told analysts.

Tech remains the best-performing sector this year, leading the S&P 500 back from its late-March low, with Apple and Netflix each up more than 50%. While some market experts are worried that Apple’s stock split will weaken performance of the price-weighted Dow, others argue tech momentum will give way to more classic market plays as we move further out in the bull market off the coronavirus March bottom. 

“This tech outperformance is to be expected given the uniqueness of this environment, but that uniqueness is beginning to fade,” Jeff Kleintop, chief global investment strategist at Charles Schwab, recently told CNBC. “It seems we’ve left the recession behind us and, hopefully, we’re now past the peak of new coronavirus cases in most of the developed world, including the U.S. …  That may mean a return to more cyclical leadership in this road to a recovery.”