The Dow Jones Transportation Average Index has finally begun to show some vitality. Although it is still down a lot, there are several stocks worth buying.

Since reaching multi-year highs at the end of July 2023, the index has fallen about 8%, while the S&P 500 index has risen 20% during the same period.

This differential has been driven by several factors. As artificial intelligence accounts for an increasing portion of the economy and corporate spending, large tech stocks have surged, driving the rise of the S&P 500 index. The profit growth of industrial manufacturers remains relatively high because customers need to invest in new equipment and bring more manufacturing back to the United States, among other trends.

At the same time, companies that transport goods have been hit hard by the downturn in profit expectations. This is because the growth of total demand for commodities has slowed to low single digits, and it is unclear whether the Federal Reserve will cut interest rates quickly enough to sustain growth.

Reduced sales or weak sales growth means decreased demand for truck and rail transportation of goods. Part of the reason is that analysts have lowered sales expectations for transportation services companies such as United Parcel Service (UPS.N), Union Pacific (UNP.N) and Old Dominion Freight Line (ODFL.O) and transportation services company JB Hunt Transport Services (JBHT.O) by several percentage points, totaling slightly over $130 billion.

The decline in profit expectations is even more severe-some companies' profit expectations have dropped by double-digit percentages-because these companies have many costs that cannot be immediately reduced when demand weakens. This affects profit margin expectations.

The poor performance of these stocks is now so evident that they appear cheap enough to buy. According to Evercore data, the market value of the transportation index is close to its lowest level since the 2020 pandemic ravaged the economy, relative to the S&P 500 index.

This sets the stage for potentially strong performance for transportation stocks in the coming years. In the past, when the index was so low relative to the market, buyers have consistently entered to support the index, especially when they see these companies have enough economic strength to generate considerable returns.

This seems to describe the current situation. The job market and economy are still expanding. The Federal Reserve may cut interest rates soon, but even if it does not, it is unlikely to further raise rates, thereby eliminating the main pressure point on commodity demand.

Evercore strategist Julian Emanuel wrote: "The US economy has started to slow down, but the strong labor market does not predict an impending recession." He called transportation stocks "a market sector that is likely to find 'value buyers' at the beginning of the third quarter and the economy remains healthy."

These buyers have already started to gradually enter. Since reaching a low point in mid-June, the transportation index has risen by 4%, exceeding the S&P 500 index's slight gain of just over 1%. As it still relative to the S&P 500 index is at historic lows, some upcoming events may trigger further gains.

This all starts with economic news. June's employment data will be released on Friday, and the stock market hopes to see the United States creating jobs, but not quickly enough to cancel out the possibility of the Federal Reserve cutting interest rates. A strong but not excessive result will push these stocks up. The Federal Reserve's monetary policy statement at the end of July hopes to cut interest rates soon.

Better-than-expected profits will also be effective. Union Pacific Railroad will release its report on July 25, which is particularly noteworthy.

The market hopes to see that the company is expected to achieve a 5% increase in sales in 2024, to $24.8 billion, which is in line with analysts' expectations. They expect that this will continue to grow in the coming years.

Management pointed out in its April earnings presentation that although the volume of shipments has not increased much in the past year, pricing has increased. The extensive routes of rail companies and decades of industry consolidation have allowed them to charge customers more over time.

This growth should help boost profit margins and profits in the coming years. Although wages and other costs will increase, total costs, especially depreciation of equipment, will not rise as quickly as revenue. Companies are expected to use their profits to buy back more stocks, so the consensus on Wall Street is that earnings should grow at a low double-digit percentage in the coming years, according to FactSet's data.

Any information confirming that these trends still exist should push up the stock price.