Global Equity Pulse: Industrials for Diversification: A Recovery Story

The industrials sector offers a range of diversification opportunities poised for cyclical recovery while still anchored to secular tailwinds.

At Templeton Global Investments (TGI), we are positive on select companies across a variety of industry groups, including but not limited to machinery, transportation, and building materials companies. They may appeal to investors seeking exposure beyond the increasingly fragile dominance of AI market leaders.

Macro Backdrop Improving

The industrials sector has in recent years become a one-way bet on AI-related infrastructure names, and aerospace and defense (A&D) companies. Together they account for US$2.7 trillion, or nearly half, of industrials’ US$5.7 trillion total market size.¹

While TGI remains invested in AI and A&D, we see a case for looking beyond these increasingly crowded trades. This view is reinforced by a broadening opportunity set, as investors look past the narrow group of AI leaders.

Our view is supported by improving industrial activity trends. Notably, the US manufacturing Purchasing Managers' Index (PMI) has stayed in the expansionary zone since January 2026 and reached the highest level in over four years at 55.6 in July 2026.²  

We believe this healthy US backdrop reflects an end to the post-pandemic inventory drawdown. Supply-chain reshoring, fiscal stimulus, and trickle-down effects of AI datacenter spending have also helped.

These conditions create the environment for a cyclical recovery in industrials, but we believe this recovery will be uneven across industry groups. Investors should aim to identify where this recovery is just starting or accelerating.

Standouts in Cyclical Recovery

One way to identify this recovery is to track the position of an industry group in the market cycle, based on its demand and revenue growth. (See Exhibit 1).

Exhibit 1: Industrials' Industry Group Positions in the Market Cycle

Source: Melius Research, TGI. As of July 17, 2026.

In a normal market cycle that goes through growth and decline, industry groups that are just bottoming out of the downcycle or are starting to climb the curve should see stronger demand recovery and revenue growth. We believe several industry groups fit these criteria, each with unique bottom-up opportunities.

HVAC and building materials providers

Within the construction industry, the residential market remains vulnerable to hawkish central bank policies in both the United States and Europe. Elevated mortgage rates are curbing housing demand, with US new home sales from January through July down 4.1% year over year.³   

Against this backdrop, we favor select companies that provide building products and solutions. While it is difficult to project the US housing market outlook amid interest-rate and affordability headwinds, the companies may benefit when housing market conditions improve. That could position the companies for potential upside relative to their market cycle, as implied in Exhibit 1. Equally compelling is the exposure these companies have to infrastructure spending, commercial construction and secular tailwinds that should anchor their growth ahead of a residential market improvement.

Among our preferred stocks is a US-based heating, ventilation and air conditioning (HVAC) provider. Fresh off a solid second quarter with robust sales growth on stable margins, the company is showing positive volume trends in both the residential housing and commercial segments. Importantly, the company is also becoming a tier-one supplier of cooling solutions to datacenters, whose orders increased by over 300% in the June quarter, reflecting a key structural growth driver.⁴  

We also like a European building materials provider with leadership in sustainability-focused products. We believe it should see better margins and top-line growth in the second half of 2026, supported by business portfolio improvements. At the same time, the company is well placed for the retrofit spending driven by Europe’s requirement for existing buildings to be net zero by 2050. This may translate to an estimated €242 billion in annual expenditures.⁵       

Transportation and heavy truck verticals

The North American transportation and logistics market has gone through years of post-pandemic recession and capacity consolidation. We believe a cyclical recovery is now underway, with the Logistics Managers’ Index showing a consistent uptrend since December 2025.⁶ This has in turn led to increasing demand in the Class 8 heavy truck market.⁷

Our favorite idea on this front is a commercial vehicle leader that recently upgraded its full-year earnings guidance on the recovery of the North American truck market. In our view, the company is well positioned to benefit from rising heavy truck order volume in the United States.⁸ Management expects the recovery to continue in 2027, as higher freight rates lead to an improvement in customer finances.

In conclusion, TGI sees several industry groups in industrials that are on the cusp of a cyclical recovery. We believe there are compelling bottom-up opportunities embedded in these recovery stories. While AI remains a core investment theme, these additional opportunities may help diversify portfolios and compound long-term returns.

Market Review

Global equities advanced in August, led by the United States and Asia Pacific, while Europe recorded a more modest gain. Strong corporate earnings and renewed buying of artificial intelligence-linked companies supported markets early in the month, alongside softer US employment and inflation data and intermittent hopes that tensions in the Middle East might ease. Conditions became more difficult later as oil prices rebounded, long-dated government bond yields rose and investors focused on the growing supply of debt required to finance both public-sector deficits and AI infrastructure investment. Markets stabilized toward month-end following reassuring results from Nvidia and some moderation in energy prices, although Federal Reserve Chair Kevin Warsh’s hawkish Jackson Hole speech kept interest-rate risk firmly in focus.

Outlook

We believe global stocks could continue to move higher over the next month. Strong company profits still support markets. Spending on AI, datacenters and technology remains a major growth driver. Economic growth has stayed steady in many parts of the world. Investors may look beyond the largest technology companies for new opportunities. The market is becoming more discriminating within AI. Strong earnings and demand updates indicated that the AI infrastructure buildout remains substantial. However, investors continue to scrutinize crowded positioning, elevated valuations and the likely returns from the considerable capital expenditure. Uneven share-price reactions across technology companies reinforce the need for greater selectivity. This strengthened the case for a broader opportunity set beyond the stocks that dominated first-half returns. Small-cap, health care, and value stocks could attract more attention. Markets may still face bumps from inflation and global conflicts. Trade policy changes could also create short-term market swings.