Manufacturing PMI: The Next Rotation is Here

Goldman taught me to source 80% of my trade ideas from the PMI reports.

There’s a reason why.

Manufacturing, specifically, leads you to hunt in the most cyclical areas of the market.

Which is exactly where the best disconnects and profit opportunities tend to show up.

And right now, September’s PMI report led me down to three industries which I’ve regarded as “coiled springs” in the past.

Coiled springs which may be about to go on a massive run as they release.

But,

Prices remain a massive issue for the cyclical economy, as the index went from 72% in August to 77.9% in September.

Inflation isn’t going away any time soon, and I think what’s being celebrated in the PMI will be erased sooner rather than later.

The reason is that, over 36 years of data, relationships between prices paid and ongoing demand suggest we’ll see a slowdown in the real economy before things finally go into a prolonged expansion path.

Remove AI, and that’s what you see in the economic data, the stock market, and in real life.

And it all connects to the rising 10-year bond yield, which currently cares less about job numbers and inflation as much as it does about fiscal/economic uncertainty.

That’s why yields will remain above 5% until term premiums peak and turn.

When that happens though…

The industries that made the biggest shift in September, like housing and some domestic materials, will be the first ones to rally off the charts.

I’ve already proven these kickstarted last quarter’s rotation in the GDP print.

Today, I will finish the job and give you the watchlist you’ll need to carry over the next 6-12 months.

Let’s get into it,

Manufacturing PMI: Where money goes next.

Prices paid did most of the heavy lifting in values for the PMI, while demand gauges remained relatively stable.

New orders and backlogs remain in a contained range since the start of 2026, which is absolutely an improvement compared to last year.

But,

Most of the inputs (prices) made the push to increase the value of these backlogs and orders.

I suspect that the majority of this demand spike is a knee-jerk reaction to price increases, especially as businesses pull their orders forward in order to lock in today’s prices before they are hit with an even bigger bill.

When you look at the landscape, it makes complete sense:

Which is why you see customer inventories as too low.

Typically, too low inventories have the effect of increased production as businesses begin to restock ahead of expected demand.

This isn’t such a case.

Negative comments built up compared to positive comments since July of this year.

From those negative comments, the prevalent issue became:

Once again,

This is not an organic demand or economic expansion episode, but rather a pull-forward behavior making the headline look stronger than it actually is.

In other words…

You want to play the constraints, pricing power, and hedges rather than focus on businesses who rely on volume.

Beginning with constraints, let’s look at what’s actually in shortage across the United States:

You may recall from last month’s read on the PMI that electrical equipment was one area to start looking into.

It remains so from the constraint and scarcity angle, especially as products have been on a consecutive 19-month short supply.

Move past memory, as we now understand from Micron’s earnings that an overshoot of supply is about to hit the market in the next 1-3 quarters.

Price wise, there are other components directly tied to the data center and AI grid buildout that continue to influence the broader PMI prices paid trend.

However,

Be very careful if you think about betting on companies that produce these metals, as this is again a pricing power theme and not a volume theme.

Look for the biggest market share, contracts, footprint.

Here’s further proof on that line of thinking:

On the metals side, you can see that output (in green) is relatively flat while prices and new orders do most of the work.

Higher prices paid = More valuable new orders.

Electrical equipment tells you a different story…

Prices have normalized while outputs and new orders continue to trend higher.

Which means electrical equipment plays become more about a volume grab rather than pricing power.

That explains why smaller players are able to win in that industry.

Such as our AAON vs JCI spread bet which has done fantastic since last month.

As good as it looks for electrical equipment right now…

I think it might be time to shift my focus away from it, especially as AI lost its grip on the economy according to last quarter’s GDP print broken down for you this week.

We know that most of the new order increases are from pull-forward demand tied to data center components.

With the mix of:

I believe the slowdown seen in the GDP will begin to carry forward into the PMI over the next six months.

After all,

The higher prices paid go, the lower new orders trend over time.

I will let that AAON vs JCI trade run amongst others in data center ideas…

But know that the biggest profits will be made elsewhere.

Several regression tests led me to the following signal:

So I pulled on that thread, and landed on a few industries that both meet the above requirements set up by the PMI trends, as well as everything else that is happening across the market and the economy.

But,

One thing is to have my own opinion of the data, and the other is to make sure that the market is actually looking in the same direction.

It currently is:

Markets have concentrated their EPS growth, PE premiums, and justified PEG ratios across the following sectors:

Out of these…

The following industries had the best scores in the 3-month composite PMI:

Let me recap everything so no thread is lost.

Electrical Equipment continues to be the leader in PMI expansion dynamics, and will continue to be an obvious profit center so long as the data center construction trends remain unaffected.

Primary Metals with pricing power and large market footprints will continue to win, also tied and dependent on data center trends remaining unaffected.

But, over the next six months, the money will be made in…

Wood Products have demonstrated the largest three-month composite score, just as housing became one of the largest contributors to last quarter’s GDP print as broken down earlier this week.

Furniture Products have the second largest composite score tied to a potential recovery in both housing and the consumer.

And,

It just so happens that the market is expecting the biggest EPS growth and also willing to pay the most forward P/E premiums for wood products and construction…

Not the type of behavior or setup that shows up unless all things point to profits ahead.

But, there’s one more thing standing in the way of these larger moves:

It looks like most sectors are being driven by the news cycle, save for:

Which are being kept lower by their sensitivity to rising 10-year bond yields right now.

My recommendation?

Build yourself a watchlist in those areas, which are now being confirmed through the PMI composite scores.

The moment the 10-year yield eases on peaking term premiums, it will be the day you plunge into these industries to make the most money on a rotation.

I’ve done it hundreds of times.

But it only fulfills if you pick the right stocks within these industries.

Here are the ones the market is selecting already:

Stay tuned to Offside Premium and the Telegram Channel, where I will be sending the second part of this PMI analysis.

Stock selections included.

You now have enough to pick some ETFs and probably beat the S&P.

But making the kind of returns we delivered by spotting software as an industry (65% in WDAY and 45% in ADBE) takes a bit of extra work.

Join Offside Premium, and see just how good it gets.

That’s all for tonight folks!

From GDP, and now in the PMI, I will reiterate the same trade I spotted in the options market earlier in the week.

We will now have to consider the options activity around some of these coiled springs.

I have found an interesting setup in the Builders FirstSource (BLDR) ticker here:

There is a good amount of betting that BLDR will see a massive rally by January 2028, to the tune of ~$192 per share.

Those long calls seem to be funded on a 2:1 ratio by shorting monthly puts for $57 strikes, which is close to where the stock sits today.

Mechanics are simple here…

Dealers will make monthly premiums to pay for their long $192 call strike position into next year, and reduce their timing and movement risk while at it.

It’s the same trade I have on for memory stocks, just betting on the opposite direction.

When you piece it all together,

It’s clear the market has already predicted and digested today’s GDP print, but us mortals are left to figure it out like we did today.

Open this again in 6-9 months and tell me I’m wrong.

Meanwhile, here is the latest from Goldman Sachs touching on how agentic commerce volumes will be a great thing for semi stocks.

I’d listen carefully and keep the capital cycle views I’ve published this week for Micron and others as well.

At some point, you will differentiate between the story and what is actually going on:

Until next time,

OFFSIDE RESEARCH

Against the Tape, Ahead of the Curve.