Green shoots on machinery’s horizon?

Over the past year, most of our coverage observed a rerating of trading multiples to the “recovery valuation” phase, as demand bottomed out and EPS troughed. Typically, the next phase requires a “baton pass” from higher multiples to improved EPS revisions. Multiples are likely to remain elevated (ISM is still in recession territory as of early in 2026, EPS are somewhat depressed, Fed is expected to cut rates) but are not likely to expand from here. This places the onus on 2026 (and certainly 2027) to be an “EPS driven” story. In fact, multiples are likely to start to de-rate heading into 2027. A key development is what “green shoots” emerge to provide visibility for growth. Used equipment values will tell us whether the pickup in sentiment may ignite the next multiyear EPS upturn in 2H26–27 (post the two-year slump). Not everyone will join the party, but currently we look for faster earnings growth in 2027 than in 2026 for the majority of our construction-related stocks.   

Core machinery markets (excluding power generation) remain in a recession — agriculture, trucks/freight, ISM, local construction — yet we see green shoots. First to recover should be construction equipment (rebuild fleets, project pipeline improves), followed by trucks in mid-2026 (freight stabilizes, emissions regulation pre-buy) with agriculture equipment the laggard. We prefer “miners over farmers” for equipment: copper is in a deficit while grains are oversupplied, and miner free cash flow is rising while farmer margins are constrained. Other niche areas of growth: gas compression and pipeline build-out, which are tied to LNG and data centers.

The data center build-out is expected to continue (2025 data center starts of $44bn more than doubled on a YoY basis and nearly 60 projects are in late-stage pre-construction over the next six months). Additionally, the grid cannot keep up (note that power infrastructure construction starts continue to massively lag data center construction starts), resulting in demand for on-site power generation. That said, investors will have to sharpen their pencils around key differences between turbines and reciprocal engines, prime power vs. backup power, original equipment vs. service capabilities. We place higher value on turbines and services. One area where “tightness” is likely to intensify? We expect the skilled labor shortage to drive a premium for craft labor.