U.S. Industrials revival: Opportunities in asset‑heavy cyclicals
In his Narrative Economics: How Stories Go Viral and Drive Major Economic Events, Nobel Prize–winning economist Robert Shiller highlights how compelling narratives can shape economic behavior and influence markets—often independent of underlying fundamentals. Today’s markets are no exception. While recent headlines have leaned toward a late-cycle narrative, a closer look at current conditions points to a more constructive opportunity set beneath the surface.
A prolonged and severe oil supply disruption would pose meaningful downside risks to global growth, but that’s not our base case. In fact, rather than signaling an imminent downturn, volatility may instead create opportunities to selectively build exposure to asset-heavy cyclical sectors that stand to benefit from sustained demand for fixed-asset investments. This backdrop suggests the US economy may be entering an early-to-mid-cycle phase characterized by renewed industrial momentum.
While concerns around slowing growth, labor market softness, and geopolitical uncertainty persist, the fundamental backdrop for cyclical sectors remains resilient. Industrial activity, manufacturing investment, and infrastructure-related demand continue to support asset-heavy cyclicals such as Industrials and Materials.
Supportive macro signals and policy backdrop
From a data perspective, the economy remains on solid footing and is, in fact, picking up steam. After growing 2.2% in 2025, our macro team is forecasting an above-trend rate of 2.5% for US real GDP in 2026, and GDPNow is projecting 3% growth in Q1 2026.1
Taken together, the data suggest momentum consistent with a US industrial revival; year-over-year industrial production accelerated to above 1.0% in July 2025 and has continued trending higher, with output up 2.3% year-over-year as of January 2026.2 The ISM US Manufacturing PMI currently reads in expansionary territory at 52.4—the second consecutive month of a reading above 50 and the highest level since 2022. This follows one of the longest periods of contraction in its history from 2022 to 2025 (Figure 1). Last cycle, the ISM Manufacturing PMI peaked at 63.8 in March 2021.3
If history is any guide, the data suggest that rather than late cycle, the US economy sits more accurately in an early-to-mid cycle environment—where economic activity and company earnings could accelerate and power cyclically sensitive equity sectors.
A supportive policy backdrop underpins the positive economic outlook. The fiscal impulse is constructive, as the One Big Beautiful Bill Act (OBBBA) supports business investments via bonus depreciation. Monetary policy is also likely to continue easing even as leadership at the Federal Reserve (Fed) transitions. Our macro team anticipates three rate cuts this year, and Fed Chair nominee Kevin Warsh has expressed even more dovish views than he exhibited during his time as a governor on the FOMC from 2006-2011. Finally, a reform of leverage requirements for big banks is slated for implementation this year. That positive change will allow banks to hold more assets on their balance sheet, lend more to businesses, and thereby stimulate new economic activity.4
AI capex tailwinds and improved fundamentals
Against this solid macro backdrop, and after years of underinvestment in “hard asset” sectors such as Materials and Industrials, it’s no surprise that the market reevaluates how it prices the earnings of industries profiting more from the physical, offline markets rather than the virtual, online world—especially amid AI’s technological disruption of existing business models. As a result, a trending equity market concept of buying stocks with ample physical assets and business models considered less vulnerable to disruption from AI has fueled growing interest in so-called “HALO” trades—heavy assets, low obsolescence.
Moreover, the capex of S&P 500 companies is expected to climb from $955.8 billion in 2024 to more than $1.54 trillion by 2027 (Figure 2). As AI capex boosts demand for the physical assets underpinning the AI infrastructure buildout—from data center construction, power generation and grid equipment, to advanced cooling systems—it has the potential to accelerate the business cycle and enhance the investment appeal of asset-heavy cyclicals, specifically Industrials and Materials.
Earnings trends underscore this dynamic. After notching 10.8% growth in 2025, Industrials’ earnings are expected to increase another 11.6% in 2026, while Materials’ 25.3% growth estimates trail only the Technology sector.5 Importantly, this strong growth is broad-based at the industry level within each sector. While companies within the metals & mining industry are expected to continue leading earnings growth in Materials on the back of strong metal prices, the remaining industries within the sector are also projected to grow by double digits in 2026.6
Within Industrials, more than half of the industries are expected to see double-digit growth this year, compared to only a quarter of industries in 2025, as underlying demand from accelerating economic activity strengthens, and noncyclical and price-insensitive demand from AI data center buildouts and higher defense spending provide positive support.7
Attractive valuations and underexposure in asset-heavy sectors
Despite recent strong performance and improving fundamentals, investors’ positioning in Industrials and Materials remains light. Materials is one of the most underweight sectors, while Industrials sit closer to a market neutral position.8 The price-to-book ratio for both Materials and Industrials continue trading at a significant discount to the asset-light Tech sector (Figure 3), leaving room for valuation convergence as investors continue to re-rate the value of tangible assets.
While the recent conflict in the Middle East has threatened the continued rebound in industrial activity and business confidence, it’s difficult to envision the conflict exceeding one or two months. US growth is also less vulnerable to an energy supply shock relative to major energy importing countries/regions, such as Japan, China, and Europe.
Barring a prolonged war that materially disrupts global energy supplies for months, the early‑to‑mid cycle conditions in fixed-asset investments are likely to persist, supporting continued strength in Materials and Industrials over the next 6-12 months. Combined with the attractive entry points for both the Industrials and Materials sectors, the current environment may offer compelling opportunities for investors able to look past competing market narratives.