Jonathan Sakraida, CFRA Research analyst, joins Market Domination to lay out the state of the industrial sector (XLI) and discuss the performance of names like Deere & Company (DE) and Caterpillar (CAT).

The industrial sector has been showing strength, which Sakraida notes has largely been driven by easing interest rates. "That 50 basis [point] cut really was a catalyst to drive this sector forward... last year, the sector was up 18%. This year it's up 20% year to date. So there's really high expectations looking really to 2025 as far as a recovery in sales and earnings growth and really a recovery in capital spending towards large capital goods like machinery," he tells Yahoo Finance.

On the other hand, he notes that valuations have gone up and multiples have increased, which he calls a "premium to the S&P 500 (^GSPC)." With that backdrop, he advises, "it really would be prudent for investors to be a bit more selective in this space and be a bit more discerning as far as where they're allocating their capital."

Sakraida has downgraded Deere from Hold to Sell, explaining that there is a continuation in the deterioration of fundamentals within agriculture and farm machinery: "There has been record harvest yields across a number of different crops, and this has only helped to balloon supplies. Prices have suffered quite significantly."

While Deere has reiterated its profit guidance last quarter, he still believes there is "high risk" in the second half of 2024, and the company could end up cutting that guidance. He adds, "And while lower interest rates are going to be a tailwind, they can't outperform those lower commodity prices. At the end of the day, farmer incomes are decreasing and that's going to hurt Deere and Co."

Sakraida has a Hold rating on Caterpillar, noting that the company will experience some favorable tailwinds, especially in its power generation business as the AI race continues to heat up. However, this is not the majority of the business, and most of its sales exist outside of the US where there are currently increased geopolitical risks.

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This post was written by Melanie Riehl