UBS analysts report that the US industrial economy is showing signs of a broader recovery, with improving demand, rising capital expenditure, and stronger pricing power spreading across more sectors. In a report released on August 11, the bank compiled insights from analysts covering major industrial fields, noting that second-quarter earnings have strengthened their confidence in the industrial cycle for the second half of 2026 and into next year.

The transportation sector remains healthy, with robust demand in aviation, improving freight activity, and a stabilizing housing market. Government and defense spending are also accelerating, while investments in power infrastructure and data centers continue to be key growth drivers. Artificial intelligence continues to benefit electrical equipment, connectors, and logistics efficiency, but UBS believes investor interest is expanding beyond companies seen primarily as AI beneficiaries. The weakest links are the automotive industry, along with parts of the chemicals and packaging sectors, where inflation and commodity costs remain concerns.

One of the strongest signals of a capital expenditure recovery beyond AI comes from spending outside AI-related markets. UBS data shows that median organic growth for non-AI industrial companies accelerated from 1% in the first quarter to 5% in the second quarter. Meanwhile, 45% of S&P 500 companies are expected to increase capital expenditure by more than 10%, up from 35% a year ago. UBS remains bullish on AI-affected industrial companies as the total addressable market for data centers continues to expand. However, analysts warn that if major data center operators adjust their capital expenditure plans or slow down, the valuations of these companies could become more vulnerable.

UBS highlights 3M (MMM.US), Johnson Controls (JCI.US), Trane Technologies (TT.US), and Parker-Hannifin (PH.US) as stocks with potential for upward earnings revisions. Additionally, as the cyclical recovery strengthens, UBS points to 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 stocks worth watching. In the machinery, engineering, and construction sectors tied to power and data center support, UBS notes improved market conditions. Nearly all companies covered by UBS beat second-quarter expectations, except AGCO (AGCO.US) and Cummins (CMI.US). Twelve companies raised their guidance, while only three lowered it. Non-residential construction continues to grow, but the agricultural market is weakening, while truck demand is expected to strengthen in the second half of the year.

Short-term industrial market trends are mixed. Power demand remains a key driver for Caterpillar (CAT.US), Cummins (CMI.US), and engineering and construction firms. For example, Quanta Services (PWR.US) has raised its expectations for grid and data center technology activities. UBS also sees accelerating private sector investment in areas like life sciences and semiconductors. UBS believes United Rentals (URI.US) will benefit from faster non-residential construction growth, while Quanta Services has strong grid demand and a solid booking outlook. These two are the bank's top picks in the sector.

Airlines still hold pricing power. Airlines performed better than expected after the earnings season. UBS says the results eased concerns about peak third-quarter revenue growth or overly ambitious fourth-quarter capacity plans. Market demand remains strong, with some airlines potentially seeing higher fourth-quarter revenue growth than the third quarter. Consumer resistance to rising ticket prices has been limited, which UBS sees as a sign of stronger pricing power in the industry. The analysts' top airline pick is United Airlines (UAL.US), followed by Delta Air Lines (DAL.US) and Alaska Air Group (ALK.US). UBS also rates American Airlines (AAL.US) and Southwest Airlines (LUV.US) as "Buy."

The freight recovery cycle is also on track, though improvements are uneven. Less-than-truckload carriers saw better-than-normal freight volume trends in July, while railroad companies like CSX (CSX.US) and Union Pacific (UNP.US) are optimistic about freight volume in the second half of the year. Domestic intermodal and some industrial customer markets are improving. Data center construction is driving flatbed trucking, while international air freight remains strong. Housing-related freight remains weak, and consumer-related activity is generally stable. UBS expects further capacity reductions in the fourth quarter to tighten the truckload market. UBS is particularly bullish on Expeditors International (EXPD.US), which beat second-quarter earnings expectations by 20%. Analysts also believe AI will create productivity opportunities for the freight forwarder, including $50 million in savings from restructuring its global technology division.

Housing is showing signs of stabilization. Housing is another key cyclical market showing signs of bottoming out. Homebuilders report improved inventory, stable demand, and the ability to reduce incentives that had been weighing on margins. Building materials companies also note stable demand, cost control, and expectations for better price-cost dynamics in the second half of the year. UBS's housing survey found that 34% of respondents plan to buy a home 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 UBS's top pick among homebuilders, while Advanced Drainage Systems (WMS.US) is the bank's preferred building products and distributor pick.

Automotive still faces risks. The automotive industry contrasts sharply with other improving sectors. UBS says the ongoing shakeout in the Chinese market continues to pressure suppliers. Although exports may have grown about 75%, Chinese domestic demand fell over 20% year-over-year in the second quarter. Weak demand for European luxury cars in China is another issue. Analysts warn that downward revisions to 2027 growth expectations will increase pressure on suppliers to boost margins through internal cost controls. Free cash flow should support continued share buybacks, while weak industry growth may prompt more M&A activity. UBS likes BorgWarner (BWA.US) due to stable auto business performance, growing opportunities outside the auto sector, and an expanded share buyback program. General Motors (GM.US) is UBS's top pick in auto manufacturing, while Amphenol (APH.US) stands out among connector makers, with AI-related revenue up 170% year-over-year.

Inflation is an unknown factor in packaging. Packaging companies report their highest year-over-year volume growth in some time, indicating resilience in consumer demand and short-cycle industrial markets. Ball Corporation (BALL.US) saw volume growth of 4.3%, Crown Holdings (CCK.US) grew 5%, Packaging Corporation of America (PKG.US) grew 4.1%, and International Paper (IP.US) grew 1.7%. The issue is rising costs for freight, recycled fiber, labor, and other inputs. UBS says companies that can sustain volume growth while significantly raising prices to outpace inflation will be winners. UBS's top picks include Packaging Corporation of America, Smurfit Westrock (SW.US), and Avery Dennison (AVY.US).

Overall, second-quarter results suggest industrial investment is gradually moving beyond reliance on a few AI and data center beneficiaries. UBS believes that broader demand, more rational pricing, and improving cyclical end markets will lay a more diversified foundation for industrial growth in 2027.