US non-residential construction spending is expected to remain under pressure through 2026 before recovering in 2027, keeping earnings pressure in place for construction-exposed companies next year, Morgan Stanley said in a Wednesday note.

The brokerage said markets have repeatedly tried and failed to call the bottom over the last two years and factors like policy expectations, interest rate cuts, and mega projects have contributed to the trend.

"We don't see a rising tide lifts all boats backdrop in 2026, but rather a stock pickers market where the valuation starting point may be a bigger determinant of performance," according to the note.

The analysts said they will be buyers of Terex (TEX), and remain optimistic on CRH (CRH), Martin Marietta (MLM) and United Rentals (URI), but continue to expect Caterpillar (CAT) to underperform.

The analysts added that they now expect spending to fall about 0.3% year-over-year after a weaker-than-expected 2025. For 2027, they expect spending to return to growth, rising 3.8%, partly driven by moderating declines in manufacturing-related projects and a broader recovery beyond data center construction as interest rates fall.

Morgan Stanley upgraded Terex to overweight, citing troughing earnings, portfolio improvement following recent mergers and acquisitions, a newer management team and a bottoming non-residential cycle.

The investment firm maintained overweight ratings on CRH, Martin Marietta and United Rentals, and reiterated an underweight rating on Caterpillar, which it said appears priced for perfection.

Morgan Stanley raised its price target on Terex to $60 from $47, on CRH to $140 from $131, and on Caterpillar to $395 from $380.

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