The U.S. Institute for Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) is a key indicator of the industrial economy in the United States. For the past nine months, the PMI has shown a contraction in the U.S. manufacturing sector. However, during this same period, the S&P 500 index has reached record highs. This unique occurrence has only happened three times before, in the years 2023-2024, 1995-1996, and 1984-1985.
While the simultaneous contraction in manufacturing and growth in the stock market may raise concerns, there are reasons why this may not be as alarming as it seems. Firstly, the manufacturing sector is no longer as dominant in the U.S. economy as it once was, comprising less than 10% of the economy compared to over a quarter in 1948. Additionally, the prolonged period of weakness in manufacturing can be attributed to companies depleting their inventory stockpiles accumulated during the supply chain crisis post-lockdowns, as well as the initial effects of tariff actions taken in 2025.
A closer look at the customer inventories data from the PMI reveals that customer inventories have been consistently low in 2025, indicating a potential need for companies to replenish their inventory levels. This bodes well for the manufacturing and industrial sectors, as it suggests a forthcoming increase in production and investment to meet demand. Furthermore, the tariff actions implemented in 2025 are intended to support U.S. manufacturing, and investments made in expanding capacity are expected to yield benefits in the future.
In light of these factors, investors concerned about AI stock valuations may find value in exploring opportunities in the industrial economy in 2026. Historical trends suggest that an industrial recovery may be on the horizon, presenting a potential opportunity for growth in this sector.
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