Morgan Stanley: Industrial Capex > Production — A Case for Selective Broadening Out
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Morgan Stanley argues that despite persistent macroeconomic uncertainty, industrial capital expenditure remains remarkably resilient. The report emphasizes that data center investments, strategic capital allocation, and pricing power will continue to protect nominal industry earnings. However, the firm warns that EBITA margin pressure, particularly from rising costs in the electrical segment, combined with climbing interest rates, presents a more substantial risk to valuations.
Encouraging signals are emerging, with United States manufacturing starts projected to recover in 2025 and 2026. Furthermore, capital goods imports in Asia, excluding China, are rebounding, indicating green shoots for capital expenditure. Because near-term cyclical demand has not exceeded 2019 levels, the risk of a severe industrial demand collapse remains limited.
Regarding sector positioning, analysts prefer Overweight ratings on Schneider Electric and Legrand within the electrical space, citing an optimal balance of growth and valuation. In upstream mining equipment, Atlas Copco and Epiroc are favored Overweight, while Sandvik remains Equal-weight. Selective broadening opportunities include Knorr Bremse and Spirax, both rated Overweight. Conversely, the firm maintains Underweight positions on Wartsila, Signify, and Kone. Hyperscale data center capital expenditure is projected to grow 79 percent in 2026 and 39 percent in 2027, acting as the primary catalyst for electrical equipment demand.