Industrial stocks will suffer from a ‘whittling down’ of Biden’s infrastructure bill and investors should shed exposure to the sector, CFRA says

• CFRA cut its recommendation on the S&P 500 industrial sector to marketweight from overweight.
• The independent research firm said infrastructure bills pending in Washington may be watered down.
• The nearly $6 trillion industrial sector has gained 16% so far this year.
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The S&P 500 industrial sector has gained about 16% during 2021 but it's time for investors to reduce exposure to the group as massive infrastructure proposals working their way through Washington are likely to be watered down, said CFRA.

The independent investment research firm cut its recommendation on the sector valued at nearly $6 trillion to marketweight from overweight.

"Group pressures include the likely whittling down of the two infrastructure bills," said Sam Stovall, chief investment strategist at CFRA Research, in a note Thursday, referencing work by lawmakers on infrastructure legislation.

The Senate in August passed a $1.2 trillion infrastructure spending bill, with the package allocating money toward fixing and building bridges, railroads, roads, and updating older power lines, among other items. Meanwhile, House Democrats are working to settle an internal debate over a bigger $3.5 trillion spending bill they have proposed. That bill would include funding for improving environmental conditions and raising taxes on the rich. Overhauling the country's aging infrastructure is a central piece of the Biden administration's agenda.

There's a risk that the results of the final legislation could be disappointing to investors in industrial companies. The sector includes makers of heavy machinery and equipment and electrical components.

CFRA said the sector is expected to record above-market forward growth in earnings per share. However, "we think this growth is already reflected in share prices as the group's P/E on forward 12-month estimates trades at a near-30% premium to its long-term average," said the research firm, citing S&P Capital IQ's consensus estimates.

For the second quarter, the industrials sector was reporting the highest year-over-year earnings growth rate of all 11 S&P 500 sectors, at 413.2%, according to FactSet.

Among the largest ETFs tracking US industrial stocks, the Vanguard Industrials fund has gained about 16% this year, and the iShares US Industrial ETF has advanced nearly 17%.