Hamilton's Ghost
Sam Klar, portfolio manager on GMO's Focused Equity team, opens his November 2026 note, Investing in American Resilience1, by reaching back more than two centuries, to Alexander Hamilton's 1791 Report on the Subject of Manufactures. Klar quotes Hamilton directly: the "independence and security of a Country, appear to be materially connected with the prosperity of manufactures." It is an old argument, but Klar is using it to make a very current case: American reindustrialization, he believes, will be "an important driver of investment returns in the decade ahead."
When the Lines Diverged
The diagnosis starts with a chart. Klar traces how U.S. GDP and industrial production tracked each other closely for decades, then split apart after China joined the World Trade Organization in 2001. GDP kept climbing on the back of technology and services. Industrial production stalled. Klar is blunt about why: China paired cheap labor with "cheap debt and loan forgiveness, direct grants, tax incentives, below-market real estate, subsidized electricity" and forced technology transfer, while following trade rules only when convenient.
Three Forces, One Direction
Three forces, Klar argues, are now pulling in the opposite direction. Public policy is the first, and he notes it is rare common ground, running "from the CHIPS Act and the Inflation Reduction Act under President Biden to the One Big Beautiful Bill" under Trump, alongside steel tariffs, shipbuilding appropriations, and semiconductor export controls that have survived changes in administration. The second is corporate policy. COVID taught companies a hard lesson about offshored supply chains, one Klar distills sharply: "if you go to China for cheap goods but aren't able to get them out of the country when you need them, you don't have cheap goods, you have no goods." Russia-Ukraine, Middle East conflicts, and tariff volatility have since reinforced the reshoring logic. The third force is defense. China's grip on rare earths used in missiles, drones, and autonomous weapons has pushed the Pentagon toward stockpiling and new commercial partnerships with industrial suppliers.
The Index Illusion
Here is where Klar's argument turns pointed. Investors who think broad U.S. equity exposure already captures this story are wrong, he says, because "the composition of the U.S. equity market has changed considerably over time." Less than 60% of S&P 500 revenue is domestic, a share that has fallen steadily for decades. More strikingly, Industrials, Energy, and Materials combined made up over 25% of the index in the late 1990s; today it is under 15%, crowded out by technology's rise. An index investor seeking passive exposure to American industry, Klar writes, has instead watched their holdings "become less U.S.-focused each year."
Picks and Shovels
GMO's answer is the Domestic Resilience strategy, launched in October 2025, built around four categories screened for majority U.S. revenue: Manufacturing & Automation (Jacobs Solutions, United Rentals, Rockwell Automation), Transportation & Logistics (Union Pacific, Knight-Swift), Energy & Materials (ConocoPhillips, Martin Marietta, Vulcan Materials), and Defense (Northrop Grumman, Lockheed Martin, Huntington Ingalls). Klar frames the reindustrialization trend itself as an option layered on top of each company's existing earnings path, and he deliberately favors "picks-and-shovels" business models over bets on which sub-theme wins. Valuation discipline is the other pillar: Klar warns that in past investment booms, from railroads to the internet, "investors who cast aside valuation concerns often ended up disappointed." That discipline currently points the team toward industrial names with limited or indirect AI exposure, precisely where crowding has been lightest.
Atoms With Your Bits
Klar closes with a line built for a Hamiltonian economy obsessed with software: investors, he suggests, should "have some atoms with your bits."
Five Takeaways for Advisors and Investors
- Standard U.S. indexes are not a reindustrialization proxy. With under 60% domestic revenue and Industrials, Energy, and Materials below 15% combined weight, the S&P 500 is structurally light on the companies positioned to benefit most.
- The reindustrialization thesis rests on three independent, bipartisan drivers, policy, corporate supply-chain behavior, and defense procurement, which reduces reliance on any single political outcome.
- Valuation discipline matters as much as theme selection. GMO's current preference for industrial names with limited AI exposure reflects where crowding, and therefore risk, is lowest right now.
- The opportunity is explicitly framed as decade-plus, not a near-term trade, which argues for sizing it as a structural allocation rather than a tactical overlay.
- Thematic exposure built through four distinct sub-sectors, manufacturing, transportation, materials, and defense, offers more diversification than a single-industry play while staying anchored to one thesis.
Footnote:
1 Klar, Sam. "Investing in American Resilience." GMO Focused Equity Insights, GMO LLC, Nov. 2026, www.gmo.com/globalassets/articles/insights/focused-equity/2026/gmo_dres_investing-in-american-resilience_11-26.pdf.
