Investment bank Oppenheimer announced Tuesday that the next phase of the industrial efficiency cycle is increasingly showing two divergent trends: accelerating AI infrastructure demand versus continued weakness in residential construction and HVAC markets. In the firm's Q3 2025 Industrial Innovation Outlook released October 14, analysts raised target prices for several key companies in the data center and automation sectors, while downgrading Carrier Global (CARR.US) due to near-term earnings risks.
Analyst Noah Kaye stated, "Industrial efficiency stocks tied to AI infrastructure are performing strongly, while those related to construction and residential markets continue to lag behind. We expect Q3 fundamentals to confirm this trend."
**Key Recommendations and Rating Changes**
Oppenheimer's top picks are Modine Manufacturing (MOD.US) and Caterpillar (CAT.US), both receiving "Outperform" ratings. The firm also reaffirmed "Outperform" ratings for AAON (AAON.US), Vertiv Technologies (VRT.US), and Rockwell Automation (ROK.US), while downgrading Carrier (CARR) from "Outperform" to "Perform" due to reduced earnings estimates and weakening recovery momentum.
The company raised target prices for several data center-focused companies: - AAON: From $105 to $112 - Modine Manufacturing: From $145 to $180 - Rockwell Automation: From $363 to $365 - Vertiv Technologies: From $151 to $190
**AI Infrastructure Development Momentum**
Oppenheimer emphasized the strong upward trend in AI-driven capital expenditures, noting hyperscale enterprise capex forecasts for 2025-2028 increased 23% compared to the previous quarter. Analysts expect this to benefit companies providing thermal management and automation system solutions for data centers.
"The ratio of planned to operational data center capacity is at multi-year highs," the report noted. "These trends, combined with improving sequential comparisons, support strong year-over-year order growth for Vertiv Technologies, AAON, Trane Technologies' CHVAC division, and Modine Manufacturing's data center business (45% growth target for fiscal 2026)."
**Building Market Weakness and HVAC Recovery Outlook**
In contrast, companies involved in residential HVAC and construction markets continue facing headwinds from sluggish housing activity and weather-related demand declines. Oppenheimer believes this sector is expected to enter a multi-year recovery phase by 2026.
Analysts indicated Lennox International (LII.US) is best positioned for the eventual rebound, while Carrier, Trane Technologies (TT.US), and Johnson Controls (JCI.US) face near-term earnings pressure from destocking and tariff-related costs.
"We view 2025 as a transition year," the report stated. "Despite pressure on residential HVAC stocks, bottoming data suggests more favorable year-over-year comparisons and pricing power may emerge by end-2026."
**Renewed Tariff Risks**
Recent U.S. tariff announcements—including expanded Section 232 provisions and International Emergency Economic Powers Act measures—could disrupt cost structures across industrial and HVAC industries. Oppenheimer expects earnings season to reignite discussions about pricing versus costs, particularly for Caterpillar (CAT) and Carrier (CARR).
"Before last Friday's White House announcement, markets had largely digested tariff impacts," the firm noted. "Now with expanded measures, full-year guidance updates will likely reflect renewed price/cost debates."
**Valuation and Long-Term Focus**
Despite elevated near-term valuations, Oppenheimer indicated investors are increasingly focused on 2027 and beyond, favoring companies with strong long-term growth and clear margin expansion prospects.
"We continue to favor enterprises with outstanding revenue growth and margin improvement trajectories," analysts wrote.
**Individual Stock Highlights**
**Modine Manufacturing (MOD.US)**: Reaffirmed "Outperform" with target price raised to $180. Oppenheimer expects brownfield capacity expansion in the U.S. and EMEA to support its goal of achieving $2 billion in data center revenue by fiscal 2028.
**Caterpillar (CAT.US)**: "Outperform" with $513 target price. The company listed Caterpillar as a top pick, citing strong infrastructure demand, stable mining trends, and pricing power in energy and transportation sectors.
**Carrier (CARR.US)**: Downgraded from "Outperform" to "Perform" due to destocking and EMEA market weakness; previous $75 target price withdrawn.
**Vertiv Technologies (VRT.US)**: "Outperform" with target price raised to $190, with upside potential tied to EMEA margin recovery and recent leadership changes.
**Rockwell Automation (ROK.US)**: "Outperform" with $365 target price, supported by medium-term margin expansion potential and solid backlog visibility.
Oppenheimer's macro team noted U.S. manufacturing remains in contraction territory, while global PMI has turned slightly expansionary led by China and Europe. Analysts expect construction and mining activity to remain mixed through early 2026, with AI infrastructure and select energy sector capex growth offsetting broader industrial weakness.
The report concluded that despite an uneven near-term landscape, AI and automation-driven capital investment continues to represent the most sustainable growth opportunity in the industrial sector.