Are industrials the Achilles' heel for earnings?

Industrials are shaping up to be the Achilles' heel for earnings.

Investors have seen warnings from Honeywell (NYSE: HON) and Dover (NYSE: DOV); uninspiring guidance from Illinois Tool Works (NYSE: ITW) and Textron (NYSE: TXT) and disappointing result from railroads, almost across the board, from Union Pacific (NYSE: UNP) to Canadian Pacific Railway (Toronto Stock Exchange: CP-CA) to Kansas City Southern (NYSE: KSU).

You can see the problem just by looking at one company that reported Thursday: Illinois Tool Works. This is one of the most diversified industrial companies in the world, selling automotive equipment, food equipment, adhesives and sealants, welding equipment, construction products, and testing/measurement equipment in 57 countries.

Earnings beat by a penny, with revenue inline. The midpoint of the full-year guidance is $5.61, a couple of pennies below the $5.63 consensus. Here's the core of the problem: organic revenue growth of 1.6 percent.

This is the world we are living in: 1 to 2 percent growth, and no matter how many countries you sell in and no matter how many products you sell, you can't get much growth. It is hard to see any acceleration in growth.

Same problem with W.W. Grainger (NYSE: GWW), which makes industrial supplies (janitorial products, ladders, safety gloves). They reported a slight beat on earnings, but full-year guidance was lowered at the midpoint. Overall sales are seen growing 1.5 to 2.5 percent year-over-year. Prior expectations were for growth of 1 to 4 percent. "We expect fourth-quarter demand to remain challenged," CEO D.G. Macpherson said.

This is all a bit maddening, because we were supposed to see improvement in the third quarter. Several companies (such as Pentair (NYSE: PNR), which makes water and fluid controls used in the oil and food & beverage business) indicated in their second-quarter reports that Industrials were bottoming. That may be the case, but we are not seeing any lift at all.

Lackluster EPS growth prospects and pressure on margins: I expect to hear this repeated frequently as some of the companies most exposed to the global economy and manufacturer report in the next week, including Ingersoll-Rand (NYSE: IR), Pentair, and Flowserve (NYSE: FLS).

There are a few positives. The U.S. consumer is still strong, so companies that sell into the consumer space like Stanley Black & Decker (NYSE: SWK) (tools), or Watsco (NYSE: WSO) (heating, ventilation and air conditioning distribution) should hold up.

And if oil can establish a new trading range of $50 to $60, that would certainly help companies exposed to Energy infrastructure like Dover (NYSE: DOV), or Flowserve, which makes pumps and flow control systems for the oil industry.

One wild card is nonresidential construction — an awful lot of stuff goes into those office buildings — if the trends hold up, companies that sell into this space like Ingersoll-Rand, Honeywell and Xylem (NYSE: XYL) might have more positive commentary.

But that's a big if. General Electric (NYSE: GE) reports tomorrow. This is the classic Industrial, even more important now that it has shifted its focus away from the Financial space and repositioned its portfolio to again concentrate on its industrial operations. They sell in more than 170 countries — virtually the entire world. They are intimately involved in infrastructure, with businesses in aircraft engines, appliances, medical imaging, water processing and wind turbines. Those businesses — Power, Aviation, and Healthcare — have been strong. That's one of the reasons they have been expecting organic revenue growth of roughly five percent for the second half of the year.

That's a tall order, especially considering other areas — Oil & Gas, Transportation (locomotives) are having a tough time.

That's why everyone will be watching GE tomorrow.

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