Top 3 Stocks Driving the Industrial Sector's Anticipated Breakout

Key Points

• Over the past week, the XLI ETF has been consolidating with its 20 and 50-day SMAs as resistance. A breakout above these levels could signal a significant bullish shift.
• The sector, represented by the XLI ETF, has lagged behind the overall market with a YTD gain of 7.32%.
• GE leads the XLI holdings, surging 59% YTD, with analysts predicting nearly 9% upside potential.

The overall market continues its impressive performance, with the SPDR S&P 500 ETF Trust NYSE: SPY up 12.35% year-to-date. While the tech sector has been the primary driver, other sectors have also contributed to the rally. One such sector is industrials, represented by the Industrial Select Sector SPDR Fund NYSE: XLI, which has lagged slightly behind the broader market, up 7.32% year-to-date.

Over the past week, the XLI ETF has been consolidating in a tight range, with its 20 and 50-day Simple Moving Averages (SMA) acting as resistance. A breakout above these levels could transform the ETF's daily chart from indicating a potential double-top to showcasing a bullish consolidation on the verge of a significant breakout. This setup indicates that the sector might be gearing up for a strong upward move if resistance turns into support soon.

So, let’s examine the sector and its ETF more closely and explore three of its top performers so far this year.

An Overview of XLI

The Industrial Select Sector SPDR Fund aims to match the Industrial Select Sector Index, representing industries like aerospace, defense, industrial conglomerates, and machinery. Managed by SSGA Funds Management, Inc., the fund has a 1.32% dividend yield and $17.97 billion in assets. It has 90.4% geographic exposure to the United States and 80% sector exposure to industrials. 

Its top holdings include household names and industry staples, like Caterpillar, Union Pacific, General Electric, Boeing, and United Parcel Service. However, there has been some change to the ETF’s top three holdings this year. CAT, UNP, and BA held the 1 - 3 spot at the beginning of the year. Fast-forward six months, and those spots are now held by GE, CAT, and RTX.

Overall, the ETF's holdings have an aggregate rating of Hold based on analyst ratings issued over the past year, covering fifty companies (88% of the portfolio). Based on those ratings, the consensus price target for the XLI is $130.46, which forecasts close to a 7% upside for the ETF.

Top 3 Performers in the Industrial Sector

Three stocks within the industrial sector have shown remarkable relative strength year-to-date, significantly outperforming both the XLI ETF and the broader market:

GE's Position in XLI Holdings

General Electric NYSE: GE has been a standout performer, surging 59% YTD, and now holds the number one spot in the XLI holdings with a 4.7% weighting. The stock is top-rated and has a moderate buy rating based on fifteen analyst ratings, with a price target forecasting almost 9% upside. Like the overall sector, GE is consolidating near its 52-week high. A breakout above last week's range could turn the potential double-top formation into a bullish consolidation on the verge of a breakout.

Market Sentiment and Forecast for RTX

Raytheon Technologies NYSE: RTX has also displayed significant strength, up 28.49% YTD. Thanks to its stellar performance, RTX is now the ETF's third-largest holding. Despite the stock's outperformance and earnings beat in April, analysts are not so bullish. The stock has a consensus rating of Hold and a forecasted downside of over 9%, based on the consensus price target of $98.33.

ETN's Year-to-Date Performance and Recent Pullback

Eaton NYSE: ETN has gained 30.73% YTD but has recently pulled back from its 52-week high, now down almost 9% from its peak in late May. Despite its outperformance, the stock is trading below its uptrend's support, key moving averages, and a clear support level of $320. For the overall sector, a positive sign would be if Eaton can reclaim its 50-day SMA and the $320 support area, indicating a return of buyer interest.

The Bottom Line

As the sector continues to consolidate, it will be vital for these three leaders to reclaim support levels and turn short-term resistance back into support. This shift is crucial for the overall sector to move from a potential double-top to a bullish consolidation, indicating that capital is again beginning to flow back into the sector. Investors should watch for the sector's ability to reclaim key moving averages and break above short-term resistance, which could signal the start of a new upward momentum phase for industrial stocks.