UBS analysts said that the U.S. industrial economy is showing signs of a broader-based recovery. Trends such as improving demand, increasing capital expenditures, and strengthening pricing power are spreading to an ever-greater number of industries.
In a report released on August 11, UBS compiled input from analyst teams across major industrial sectors, noting that stronger second-quarter earnings have boosted its confidence in the industrial cycle in the second half of 2026 and next year. The transportation sector remains healthy, with strong air demand and improving freight activity, while the real estate market is also trending toward stability.
Government and defense spending is also accelerating, while investment in power infrastructure and data centers remains an important growth driver. AI continues to benefit electrical equipment, connectors, and logistics efficiency, but UBS believes investor interest is broadening beyond companies mainly seen as beneficiaries of AI.
A clear weak spot is the auto sector, as well as parts of the chemicals and packaging industries, where inflation and commodity costs remain a concern.
Capital expenditure recovery goes beyond AI
One of the strongest signals comes from capital expenditure outside of AI-related markets. UBS data show that the median organic growth for non-AI industrial companies accelerated from 1% in the first quarter to 5% in the second quarter. Meanwhile, among S&P 500 constituents, 45% of companies are expected to increase capex by 10% or more, versus 35% in the same period last year.
UBS remains optimistic about industrial companies influenced by artificial intelligence, as the potential market for data centers continues to expand. However, analysts warn that if mega-scale data-center operators slow down the pace of their capital expenditure adjustments, valuations for these companies could become even more fragile.
UBS is focusing on companies that may see upward revisions to earnings expectations, including 3M (MMM.US), Johnson Controls (JCI.US), Trane Technologies (TT.US), and Parker Hannifin (PH.US). In addition, as the cyclical recovery strengthens, UBS also points to stocks such as Honeywell (HON.US), Dover (DOV.US), Crane (CR.US), Ingersoll Rand (IR.US), Emerson Electric (EMR.US), Gates Industrial (GTES.US), and Flowserve? (FLS.US) as worth watching.
Power and data centers support machinery industry
The machinery, engineering, and construction segments also show signs of improving market conditions. Nearly all the companies UBS covers reported second-quarter results that beat expectations, with only AGCO (AGCO.US) and Cummins (CMI.US) as exceptions. Twelve companies raised their earnings outlook, while only three lowered theirs.
Non-residential construction continues to grow, while agricultural markets are weakening and truck demand is expected to strengthen in the second half. In the short term, industrial market trends are diverging.
Electricity demand remains a key driver for Caterpillar (CAT.US), Cummins (CMI.US), and engineering and construction companies. For example, Quanta Services (PWR.US) has raised its expectations for activity related to grids and data centers. UBS also believes private-sector investment in areas such as life sciences and semiconductors is accelerating.
UBS believes United Rentals (URI.US) will benefit from accelerated non-residential construction, while Quanta Services has strong grid demand and a good backlog outlook—both are its top picks in the segment.
Airlines still hold pricing power
Airlines outperformed investor expectations after the end of earnings season. UBS says results alleviated concerns that third-quarter revenue growth may have peaked or that fourth-quarter capacity plans may be too high. Market demand remains strong, and some airlines’ fourth-quarter revenue growth could exceed that of the third quarter.
There is limited backlash to consumers’ continued higher ticket prices, and UBS believes this indicates airlines’ pricing power has improved. UBS’s top-rated airlines are United Airlines (UAL.US), followed by Delta Air Lines (DAL.US) and Alaska Air Group (ALK.US). UBS also gives “buy” ratings to American Airlines (AAL.US) and Southwest Airlines (LUV.US).
Freight recovery momentum remains strong
The recovery cycle in transportation is also still unfolding as planned, though improvements are not uniform. Freight trends for less-than-truckload carriers in July were better than in prior years, while rail companies—including CSX Transportation (CSX.US) and Union Pacific Railroad (UNP.US)—were optimistic about freight-volume prospects for the second half. The U.S. intermodal market and parts of the industrial customer market are improving.
Data-center construction is driving flatbed truck transport, and international air freight remains strong. Freight related to housing is still weak, while consumption-related activity overall remains stable. UBS expects that a further decline in capacity in the fourth quarter will tighten the truckload market.
UBS is particularly bullish on Expeditors International (EXPD.US), whose second-quarter earnings beat expectations by 20%. Analysts also think AI will create productivity-improvement opportunities for this freight forwarding company, including by reorganizing its global technology operations to save $50 million.
The housing market shows signs of stabilization
Real estate is another important cyclical market, and there are already signs of a bottoming-out rebound. Homebuilders report improved inventory, stable demand, and the ability to begin scaling back incentive measures that have previously weighed on profit margins. Building-materials companies also point to steadier demand, controlled costs, and an expected improvement in price-versus-cost trends in the second half.
UBS’s housing survey found that 34% of respondents plan to buy a home within the next 12 months, up from 30% for the historical average. About 61% of respondents expect to begin home repair or renovation projects, slightly higher than the 59% historical average.
PulteGroup (PHM.US) is UBS’s top pick among residential builders, while Advanced Drainage Systems (WMS.US) is UBS’s favorite building products and distribution company.
The auto sector still faces risks
The picture in the auto industry stands in sharp contrast to the improving outlook in other sectors. UBS says China’s market reshuffling continues to weigh on suppliers. Although exports may have risen by about 75%, domestic demand in China fell by more than 20% year over year in the second quarter. Weak demand for luxury cars in China is another issue.
Analysts remind investors that growth expectations for 2027 will be lowered, which will put more pressure on suppliers and force them to improve profit margins through internal cost-control measures. Free cash flow should support continued share buybacks, while weak industry growth could lead to more mergers and acquisitions.
UBS is bullish on BorgWarner (BWA.US), citing steady performance in its automotive business, growing opportunities beyond autos, and an expansion of its share buyback program. General Motors (GM.US) is UBS’s top pick among automakers, while Amphenol (APH.US) stands out among connector manufacturers, with AI-related revenue up 170% versus the same period last year.
Inflation is the unknown factor for the packaging industry
Packaging companies report that their year-over-year sales growth hit the highest level in nearly a while, again showing that consumer demand and shorter-cycle industrial markets remain resilient.
Ball (BALL.US) sales grew 4.3%, Crown Holdings (CCK.US) grew 5%, U.S. Packaging Company (PKG.US) grew 4.1%, and International Paper (IP.US) grew 1.7%. The issue is higher freight rates, recycled fiber, labor, and other costs.
UBS says companies that can sustain volume growth while also significantly raising prices to outperform inflation will be the winners. UBS favors U.S. Packaging Company, Smurfit Kappa? (SW.US), and Avery Dennison Corporation (AVY.US).
Overall, second-quarter results indicate that industrial investment is gradually moving away from reliance on a narrow set of AI and data-center beneficiaries. UBS believes that a broader base of demand, more rational pricing mechanisms, and improving cyclical end markets will provide a more diversified foundation for industrial growth in 2027.