Industrials: a hesitant recovery meets an investment boom

The industrial recovery has proved less Top Gun and more holding pattern. Tariffs and the closure of the Strait of Hormuz have delayed take-off, but the sector still has powerful engines behind it: a manufacturing rebound and sustained investment in AI infrastructure, power networks, semiconductor capacity, and local production. Valuations are not cheap, but high-quality industrial companies continue to trade at reasonable levels, given their long-term earnings prospects.

The recovery keeps hitting speed bumps

The investment case for industrial companies rests on a manufacturing recovery with room to run. Global manufacturing has endured a prolonged downturn since the post-COVID boom. As the boom ended, supply chains returned to normal, companies ran down existing stocks, and investment in equipment and facilities remained weak. A recovery then began to emerge as inventories rebuilt and early measures of future demand, such as new orders, improved. But momentum stalled after the US government announced widespread import tariffs on ‘Liberation Day’ in April 2025.

The recovery subsequently became more evident as the harshest tariff announcements didn’t come to fruition and companies took mitigating measures. However, expansion suffered another setback on the outbreak of the Iran War and the effective closure of the Strait of Hormuz. With oil at $100 per barrel and inflation fears pushing up interest rates, conditions are becoming more challenging for the typical industrial company.

Nevertheless, companies serving ‘short-cycle’ markets (where demand responds relatively quickly to changes in economic conditions or customers’ stock levels) continue to report healthy underlying demand. These include industrial machinery, factory automation, and pneumatic equipment, such as air-powered drills.

For instance, German technology group Siemens has reported a steady recovery in industrial automation revenue from a 2024 low, although it remains well below the post-pandemic peak.

The wider economic data tell a similar story. Global manufacturing purchasing managers’ indices, or PMIs, have remained above the magic number of 50 for much of 2026. A reading above 50 indicates that manufacturing activity is expanding rather than contracting. Recent surveys point to rising production, improving orders, and recovering employment across the US, Europe, and parts of Asia. Even so, the pace of improvement remains well below what would normally be expected during a manufacturing recovery.

Industrial companies often have high fixed costs, so their profits can rise faster than their sales when demand improves. This means earnings can exceed market expectations during a recovery. Current sector forecasts suggest there’s still scope for companies to deliver better earnings than analysts expect.

Global manufacturing gets back into gear

Large projects offer a longer runway

Larger, longer-term investment projects also provide an encouraging backdrop for industrial companies. These ‘long-cycle’ businesses typically receive large orders based on particular projects rather than demand. These projects take longer to complete and can provide several years of future work. As a result, they’re less affected by the short-term changes in customers’ stock levels that influence short-cycle companies. Examples include aerospace and defence, power generation, and electricity grid infrastructure.

Investment in AI infrastructure has clearly been a powerful long-term theme over the last three years or so. While the majority of this spending – about 70% – relates to semiconductors, the sheer scale of investment is also having a meaningful effect on a wide range of traditional industrial end markets.

For instance, data centres require vast amounts of sophisticated electrical equipment supplied by companies such as French energy technology group Schneider Electric and, to a lesser extent, Siemens. Around 40% of Schneider Electric’s total revenue comes from data centre investment. This helps explain the company’s annual earnings growth of 13% over the past five years and expectations for similar growth over the next five.

AI’s appetite collides with the grid

Given the amount of energy AI data centres use, there is increasingly insufficient power generation or grid infrastructure available to meet their needs without affecting other consumers. This comes on top of the continuing shift towards using electricity to power transport and industry, creating the need for sustained investment in energy infrastructure.

Growing waiting times for power generation and electricity network equipment suggest that demand is already exceeding supply. For example, orders at large-scale gas turbine producers such as US energy equipment group GE Vernova and Siemens Energy have risen well above historical norms. Waiting lists for these turbines now extend to five years and beyond in some cases.

With waiting times for equipment and connections to the electricity network continuing to lengthen, many companies are looking for alternative ways to power data centres. ‘Speed to power’, meaning how quickly a data centre can secure the electricity it needs to begin operating, has become a common concern during construction. Major suppliers of temporary power solutions, including US construction and power equipment manufacturer Caterpillar, are stepping into this space with generation equipment that can operate independently of the grid network.

While the US is at the centre of energy investment, similar developments are underway across Europe. Governments are committing considerable capital to energy grids and new generation capacity, often from renewable sources. This strong underlying demand benefits the companies that manufacture the equipment and extends to a long list of suppliers and related contractors.

The chip boom reaches industrial suppliers

Semiconductor demand has increased exponentially, and manufacturers are now beginning to increase investment in additional production capacity. In addition to the critical lithography and deposition machines needed to produce chips, semiconductor factories also need large numbers of vacuum pumps and gas treatment systems.

These keep the manufacturing environment free from particles and hazardous gases. Swedish industrial equipment group Atlas Copco is the global leader in vacuum pumps and has reported very strong orders over the past couple of quarters.

Tariffs make local production pay

Tariffs typically harm economic growth. However, as these trends have been continuing for some time, companies worldwide are taking steps to limit their impact. In practice, this means reorganising their operations to serve more customers through local production. As a result, companies are building new manufacturing facilities around the world, creating demand for equipment.

The industrial recovery may still be circling through some turbulence, but its longer-term engines are already running. Investment in AI infrastructure, energy networks, semiconductor capacity, and more local supply chains should sustain demand well beyond the next turn in the economic cycle. If manufacturing gathers speed too, the sector may finally be cleared for take-off.