This year, the stock market could show investors a new divide, unlike anything that portfolios have dealt with in the past economic cycle. After contracting for over 15 months, the U.S. manufacturing and industrial sector could be set up to outperform others, even if there are currently hot issues in the technology sector.

While some may keep their focus – and capital – in names like Nvidia Co. (NASDAQ: NVDA) or choose to follow the meme stock revival in GameStop Corp. (NYSE: GME), however, the best odds to potentially outperform the market could be found in boring names within the Dow 30 index.

These companies include stocks like Caterpillar Inc. (NYSE: CAT), Home Depot Inc. (NYSE: HD), and even Honeywell International Inc. (NASDAQ: HON). As the Dow index hit 40,000 for the first time, these seemingly boring industrial stocks could catch up this quarter.

The Economy is Just Right

According to this 2024 macro outlook report set by the Goldman Sachs Group Inc. analysts, the U.S. manufacturing sector could be set for a breakout this year; here’s why.

Because the Federal Reserve (the Fed) proposes cutting interest rates later this year, which could be as soon as September 2024, according to the CME’s FedWatch tool, the dollar index could decline in value (as most currencies are valued based on their interest rates).

A potentially lower dollar could make American exports more attractive for foreign buyers, a theme that was present in February’s ISM manufacturing PMI index, which delivered a 6.4% bump in export orders. To fulfill these orders, the manufacturing sector needs to start producing, and that’s where corporate profits are set to soar.

Now that investors understand where the Dow’s momentum is coming from, three stocks could carry investors even higher.

1. Caterpillar

Investors need a dull, under-the-radar stock that is still exposed to one of the biggest trends in the economy. Weighing at 5.8% of the Dow index, Caterpillar is one of the key companies in the U.S. and globally.

Because the real estate sector is at a stalemate currently. The average homeowner holds a mortgage of 3.25% (according to the Intercontinental Exchange), giving them close to zero reasons to let go of that cheap rate compared to today’s 7.3%. 

Those looking to buy a new home must handle today’s higher rate. If it wasn’t enough, they would also be shopping for a 32% more expensive home compared to pre-pandemic average home prices. The only way to break this market freeze is to build, as new supply could help normalize prices.

Analysts at Goldman Sachs see this trend, so they boosted Caterpillar's price target to $408 a share, calling for a 15% upside from today's price. 

More than that, markets are willing to pay a 9.9x price-to-book multiple for Caterpillar’s balance sheet, which carries 62% debt today. Because the Fed may cut rates later this year, markets are bullish on Caterpillar’s leverage and fundamental play in the construction sector.

2. The Home Depot

Following Caterpillar’s thesis, owners and landlords will always find a few dollars in their budgets for renovation and needed repairs, whether new homes or existing ones. This is where The Home Depot comes into play. 

Knowing that, as of the fourth quarter of 2023, Home Depot held a 61.9% market share in the home improvement industry, markets felt comfortable bidding the stock up to 87% of its 52-week high. But how does this compare to peers?

Controlling only 35% of the industry, Lowe’s Companies Inc. (NYSE: LOW) fell to a 30% discount to Home Depot on a price-to-sales (P/S) basis. Stocks typically have a good reason to trade at premiums over comparable peers. Home Depot’s market share exposed to upcoming home sales is one of them.

Bank of America deemed Home Depot worthy of a $425 valuation. The stock must rally 23.4% from its current price to prove these targets right. 

These trends and fundamental factors justify Home Depot’s positioning in the Dow today, carrying a weight of up to 5.6%.

3. Honeywell International

How is the manufacturing sector potentially set for a busy rest of 2024? Honeywell International could be called upon for its building and manufacturing automation technology solutions, as efficiency is critical upon a sector breakout. 

Not only that, as oil prices flirt with their $80 a barrel ceiling once again, Honeywell’s exposure to the energy sector – sustainable solutions in particular – could help the company see brighter days ahead, as more expensive oil makes alternative energy more attractive. 

Because of this, markets placed a P/S premium of 120% in Honeywell’s 3.4x valuation, compared to 3M (NYSE: MMM) and its 1.6x multiple today. 

Leaning on this market's willingness to overpay for a stock, analysts at Barclays felt comfortable placing a $232 valuation on Honeywell today, calling for a 13% upside on top of the stock's 2.1% annual dividend yield today. 

If that wasn’t enough, the stock’s quality and potentially bullish road ahead called for up to $357 billion of institutional buying over the last 12 months, keeping its weight in the Dow at 3.4%.