Industrials Complexity Has Elevated Q2 Earnings Risk: Here's Why

Recent chatter has shown increased concerns over industrial stocks in the second quarter.

Axiom analyst Gordon Johnson noted of the seven non-residential construction U.S. data points the firm tracks, all seven were incrementally weaker in April. This event has only happened once in the past 17 months.

Construction job growth was also below the estimate in May, but was still a positive according to TD Ameritrade Chief Strategist JJ Kinahan.

The data signals that the “animal spirits” driving the industrial complex are now working in reverse, elevating Q2 calendar 2017 earnings risks.

Caterpillar Inc. (NYSE: CAT) and United Rentals, Inc. (NYSE: URI) were of particular interest on Monday.

Both are rated Sell by Axiom, but Johnson said any earnings disappointments for Caterpillar could result in a re-rating lower. The company is up over 40 percent year over year.

United Rentals is up 48.4 percent over the same period. The company has “materially outperformed” Axiom’s Capital Research Industrial Equipment OEM Index as well as the S&P 500, leading Johnson to believe profit taking could be on tap in the near term.

The Industrial Select Sector SPDR Fund (NYSE: XLI) is up over 6.5 percent since Inauguration Day, but up just 1.3 percent over the last one month. This week, dubbed by President Donald Trump as "Infrastructure Week," the ETF is down 0.6 percent thus far.

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