The U.S. Institute for Supply Management (ISM) manufacturing Purchasing Managers Index (PMI) is the oldest and most widely respected set of data on the industrial economy in the U.S. It has also indicated a contraction in the U.S. manufacturing sector for the last nine months. Meanwhile, the S&P 500 has hit all-time highs.
The concurrence of nine consecutive months of manufacturing contraction (based on PMI data) and the S&P 500 index hitting all-time highs has only happened three times before, in 2023-2024,1995-1996, and 1984-1985.
There are two reasons why it’s not a big deal, and one that implies an opportunity. First, the manufacturing sector isn’t as large a part of the economy as it used to be. It was more than a quarter of the U.S. economy when the modern PMI began in 1948, and it is now less than 10%.
Second, one reason for the protracted period of weakness (which also encompasses the 2023-2024 period) is an extended period during which manufacturers have run down inventory built up in response to the supply chain crisis following the end of lockdowns. This weakness may also be compounded by the initial impact of the tariff actions taken in 2025.
This leads into the third point, because a quick look at the customer inventories data from the PMI shows contraction through 2025, with customer inventories “too low” on a net basis.
This is a bullish sign for the manufacturing/industrial sector, as it implies that companies will now need to replenish their inventory. Additionally, the tariff actions are designed to support U.S. manufacturing, and investments made in expanding capacity in the U.S. in 2025 are expected to yield benefits in the future.
All told, if you are worried about AI stock valuations and not so much about overall growth in the economy (including AI), then it’s a good idea to start thinking about investing in industrial economy stocks in 2026, because history suggests an industrial recovery is around the corner.
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