UBS: The U.S. industrial recovery is spreading from AI to broader industries, and the winner list has been released.

Analysts at UBS Group AG have indicated that the U.S. industrial economy is showing broader signs of recovery, with improving demand, increased capital expenditures, and strengthened pricing power spreading across more industries. In a report released on August 11, UBS Group AG gathered insights from a team of analysts covering various industrial sectors, noting that the stronger earnings in the second quarter have bolstered their confidence in the industrial cycle for the second half of 2026 and into next year. The transportation sector remains healthy, with robust airline demand, improving freight activity, and a stabilizing real estate market. Government and defense spending are also accelerating, while investments in power infrastructure and data centers continue to be significant growth drivers. Artificial intelligence continues to benefit electrical equipment, connectors, and logistics efficiency, but UBS Group AG believes investor interest is expanding beyond those companies primarily seen as beneficiaries of AI. The notable weak spots remain in the automotive sector, along with certain chemicals and packaging industries, where inflation and commodity costs continue to be concerning issues. Capital expenditure recovery extends beyond artificial intelligence One of the strongest signals comes from capital expenditures outside of AI-related markets. Data from UBS Group AG shows that the median organic growth for non-AI industrial companies accelerated from 1% in the first quarter to 5% in the second quarter. At the same time, it's expected that 45% of companies in the S&P 500 index constituents will increase capital expenditures by more than 10%, compared to 35% a year earlier. UBS Group AG remains optimistic about industrial companies affected by AI due to the expanding potential market for data centers. However, analysts caution that if capital expenditure plans for hyperscale data center operators slow, the valuations of these companies may become more vulnerable. Among the companies with earnings expectations likely to be raised, UBS Group AG has highlighted 3M (MMM.US), Johnson Controls International plc (JCI.US), Trane Technologies (TT.US), and Parker-Hannifin (PH.US). Additionally, as cyclical recovery strengthens, UBS Group AG points out that stocks such as Honeywell International Inc. (HON.US), Dover (DOV.US), Crane (CR.US), Ingersoll Rand Inc. (IR.US), Emerson Electric Co. (EMR.US), Gates Industrial (GTES.US), and Flowserve Corporation (FLS.US) are worth watching. Power and data centers support the machinery sector The machinery, engineering, and construction sectors also show signs of improved market conditions. Nearly all companies covered by UBS Group AG exceeded expectations in the second quarter, with the exceptions being AGCO Corporation (AGCO.US) and Cummins Inc. (CMI.US). Twelve companies raised their earnings expectations, while only three companies lowered theirs. The non-residential construction sector continues to grow, while the agricultural market is weakening, and truck demand is expected to strengthen in the second half of the year. The short-term industrial market trend is diverse. Power demand remains a significant driver for Caterpillar Inc. (CAT.US), Cummins Inc. (CMI.US), and engineering and construction companies. For example, Quanta Services (PWR.US) has raised its expectations for grid and data center technology activities. UBS Group AG also believes private sector investments in areas like life sciences and semiconductors are accelerating. UBS Group AG sees United Rentals, Inc. (URI.US) benefiting from the accelerated development of non-residential construction, while Quanta Services has strong grid demand and a favorable booking outlook, making both companies top picks in that sector. Airlines maintain pricing power Airlines have outperformed investor expectations following the earnings season. UBS Group AG states that the performance alleviated concerns that revenue growth would peak in the third quarter or that fourth-quarter capacity plans were too optimistic. Market demand remains strong, and some airlines may experience revenue growth in the fourth quarter exceeding that of the third quarter. Consumer reluctance to continue ticket price increases appears limited, which UBS Group AG believes indicates enhanced pricing power in the airline industry. Analysts favor United Airlines (UAL.US), followed by Delta Air Lines, Inc. (DAL.US) and Alaska Air Group, Inc. (ALK.US). UBS Group AG has also given "Buy" ratings to American Airlines Group Inc. (AAL.US) and Southwest Airlines Co. (LUV.US). Freight recovery momentum remains strong The recovery cycle in the transportation industry is progressing as planned, despite varying degrees of improvement. LTL carriers showed better shipment volume trends in July compared to previous years, while railroads, including CSX Corporation (CSX.US) and Union Pacific Railroad Company (UNP.US), have optimistic freight volume prospects for the second half of the year. The U.S. domestic intermodal and some industrial customer markets are improving. Data center construction supports flatbed trucking, and international air freight remains strong. Housing-related freight continues to be weak, while consumer-related activities generally remain stable. UBS Group AG anticipates that further declines in capacity in the fourth quarter will tighten the truckload transportation market. UBS Group AG is particularly optimistic about Expeditors International (EXPD.US), which exceeded second-quarter earnings expectations by 20%. Analysts also believe that AI will create productivity-enhancing opportunities for this freight forwarding company, including saving $50 million through restructuring its global technology department. Housing market shows signs of stabilization Real estate is another important cyclical market, which has begun to show signs of bottoming out. Homebuilders report improved inventory, stable demand, and the ability to start reducing incentives that have previously depressed profit margins. Building materials companies also indicate that demand is stabilizing, costs are being controlled, and prices are expected to improve in the second half of the year. UBS Group AGs housing survey found that 34% of respondents plan to buy a house in the next 12 months, above the historical average of 30%. About 61% of respondents expect to start home repair or renovation projects, slightly above the historical average of 59%. PulteGroup (PHM.US) is the preferred residential builder for UBS Group AG, while Advanced Drainage Systems (WMS.US) is the top choice for building products and distributors. Automotive industry still faces risks The automotive industry stands in stark contrast to the improving scene in other sectors. UBS Group AG states that ongoing reshuffling in the Chinese market continues to pressure suppliers. While exports may have surged about 75%, domestic demand in China fell by more than 20% year on year in the second quarter. Weak demand for Deluxe Corporation vehicles in China is another issue. Analysts caution investors that growth projections for 2027 will be adjusted downward, putting greater pressure on suppliers and forcing them to enhance margins through internal cost control measures. Free cash flow should support ongoing stock buybacks, while the sluggish industry growth may prompt more M&A activity. UBS Group AG is optimistic about BorgWarner Inc. (BWA.US), citing stable performance in its automotive business, increasing opportunities outside of the automotive sector, and an expanded share buyback program. General Motors Company (GM.US) is UBS Group AG's preferred automaker, while Amphenol (APH.US) stands out among connector manufacturers with a 170% year-over-year growth in AI-related revenues. Inflation is an unknown factor for the packaging industry Packaging companies report their highest year-on-year sales growth in recent time, indicating that consumer demand and the short-cycle industrial market remain resilient. Ball Corporation (BALL.US) saw a 4.3% sales increase, Crown Holdings (CCK.US) grew by 5%, Packaging Corporation of America (PKG.US) increased by 4.1%, and International Paper Company (IP.US) experienced a 1.7% growth. The issues lie in rising shipping costs, recycled fiber, labor, and other expenses. UBS Group AG states that companies capable of maintaining continuous sales growth while significantly raising prices to outpace inflation will emerge as winners. Companies favored by UBS Group AG include Packaging Corporation of America, Smurfit Kappa Group (SW.US), and Avery Dennison Corporation (AVY.US). Overall, second-quarter performance indicates that industrial investment is gradually moving away from relying solely on a few AI and data center beneficiaries. UBS Group AG believes that the increased breadth of demand, more rational pricing mechanisms, and improvements in cyclical end markets will lay a more diversified foundation for industrial growth in 2027.