By Jacob Sonenshine

Industrial stocks are reacting well -- too well -- as the companies report strong quarterly earnings. Don't buy more of these names now.

The majority of the 41 S&P 500 industrial companies that had reported first-quarter earnings as of Tuesday evening turned in higher numbers than expected. On average, results were 6.1% higher than expected, boosted by sales that were narrowly better than anticipated and slightly larger profit margins.

Sales are nearly flat year over year as tariffs weigh on economic activity and businesses struggle to forecast which levies will remain in place and how much equipment and supplies they should order. But earnings per share have risen by 6.4% as industrial companies keep their costs in check, allowing margins to remain stable, and buy back more shares.

This has been enough to lift the stocks. As of the close on Tuesday, the average stock-price movement for industrials on the trading day after earnings has been a gain of almost 2%. That compares with an average of 0.3% for all companies in the S&P 500.

The trend continued Wednesday. Trane Technologies, which makes heating, ventilation, air conditioning, and other products, reported higher sales, earnings, and margins than expected. Shares were up just over 6% in early afternoon trading as management forecast better results than expected. Shares had risen 13% over the past five trading days on expectations for a strong result.

The post-earnings gains for Trane and others are boosting the stocks of industrial companies that haven't reported their results. The numbers indicate that the industrial economy is holding up better than feared, so the market is positioning for respectable earnings from more companies.

Carrier Global, which has risen 10% from its early April low, now trades at a higher price/earnings ratio. That means earnings and management's financial guidance, due Thursday, have to exceed a higher hurdle to give the stock a boost. If the numbers fall short, the stock is now more likely to drop.

Other companies are similar. Emerson Electric is up 10% from its April low and reports earnings May 7. Deere, up 11%, will disclose its results on May 15.

Eaton stock is up 17% from its April low, including a rally in the past five days, as investors look ahead to its results on Friday. Like Trane, it sells some equipment to data-center customers, so Trane's results have raised expectations for its performance in that segment. Analysts are looking for sales of $6.24 billion and EPS of $2.83, estimates that have barely changed in the past few months, so the gain in the stock means the shares are more expensive.

The stock now trades at about 23 times expected earnings for the coming 12 months, up from just under 20 times at the beginning of April. Like Carrier, it will have to outperform, either in terms of its results or its financial guidance, for the shares to rise.

Guidance is nothing to hang one's hat on these days, making the stock look fairly risky into earnings. While Trane issued a clear and positive forecast, not all companies are able to do that this quarter. Many companies don't have enough certainty about what comes next to offer forecasts with any conviction. Some have even cut their guidance.

Just don't buy these industrials right before earnings. They have probably come too far too fast.

Write to Jacob Sonenshine at jacob.sonenshine@barrons.com

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April 30, 2025 14:08 ET (18:08 GMT)

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