We believe a host of economic indicators—combined with rising animal spirits—should continue to support corporate earnings growth and a broadening of the U.S. equity market in the coming year.
One key data point, in our view, is the brightening outlook for industrial activity, which could spur an increase in capital expenditures (capex) and provide a tailwind for value stocks and small caps. Manufacturing continues to be a crucial driver for goods-oriented sectors, which tend to dominate value and small-cap indices.
Global industrial activity has been on a downswing for more than two years, a trend that has favored growth-oriented and large-cap stocks, both of which are inherently less sensitive to industrial activity.1 Recent data suggest to us that global industrial activity will gain momentum and the manufacturing recession will end in 2025, giving way to a multiyear industrial recovery, which could give a boost to value stocks and small caps.
We believe there are fundamental reasons to expect strengthening industrial production; for example, the corporate restocking cycle (highlighted in our 4Q 2024 Equity Market Outlook) remains robust as companies continue to replenish inventories, further boosting industrial activity. We also think that strong retail sales, potentially improving demand in mainland China, and a rise in imports (following U.S. port strikes and weather disruptions) should continue to support industrial activity in the near term. Improving corporate capex, a major component of industrial production, has the potential to sustain this trend.
Historically, capex has lagged behind earnings growth and business confidence by about nine months;2 both have recently moved higher, which we believe is supportive of future capex spending. As uncertainty surrounding the U.S. presidential election has faded and policy direction has clarified, companies appear to us to be increasingly comfortable about committing funds to capex: Goldman Sachs forecasts capex growth to accelerate next year and grow 2.6 times faster than U.S. GDP.3
To us, these collective observations suggest early signs of a return to the traditional manufacturing economy—a shift that we believe favors a rotation from growth stocks into value stocks, and large caps into small caps (see figure 1).
Figure 1. A Potential Rise In Manufacturing Activity and Capex Could Provide a Tailwind for Value Investors
Source: Neuberger Berman research and FactSet. Data as of November 30, 2024. Nothing herein constitutes a prediction or projection of future events or future market behavior. Historical trends do not imply, forecast or guarantee future results. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed or any historical results. Past performance is not indicative of future results.
For more on what we expect from the equity markets in the coming months, please see our 1Q2025 Equity Market Outlook.
