Investment Rating - The industry view is rated as Attractive [7] Core Insights - The MS Capex Tracker indicates that US next twelve months (NTM) capital expenditure intentions have accelerated to +20% through Q3, up from +10% at the start of the year, primarily driven by Data Center investments [3][4] - The report highlights a significant positive rate of change in capital expenditure, particularly from US Hyperscalers, which aligns with the "Data Center vs Everything Else" theme [3] - There is potential for manufacturing capital expenditure to increase further into 2026 due to improved tariff policies, supporting the $10 trillion reshoring thesis [3][4] - The report identifies key companies well-positioned for growth, including Trane Technologies (TT), Eaton Corporation (ETN), Johnson Controls International (JCI), Vertiv Holdings (VRT), Rockwell Automation (ROK), and Acuity Inc. (AYI) [3] Summary by Relevant Categories Capital Expenditure Trends - NTM capital expenditure leaders include Hyperscalers (+78%), Tech Hardware (+20%), Utilities (+18%), and Aerospace (+12%) [9] - Laggards in capital expenditure include IT (-14%), Chemicals (-9%), Automotive (-7%), Food & Beverage (-6%), Semiconductors (-4%), and Energy (-3%) [9] Rate of Change in Capital Expenditure - The rate of change for NTM capital expenditure shows leaders such as Hyperscalers (+38%) and Tech Hardware (+20%), while laggards include Chemicals (-16%) and IT (-16%) [12]

Summary of Conference Call Notes Industry Overview - The focus is on the **Multi-Industry** sector in **North America** with specific attention to the impact of **Trump 2.0 tariffs** on pricing dynamics [1][7][75]. Key Insights - **Price Dynamics**: The year-to-date (YTD) change in Producer Price Index (PPI) by category indicates that certain verticals are better positioned to sustain price increases into Q3 compared to others [2][4]. - **Industrial Sector Performance**: Despite positive Q2 updates, US Industrials experienced a de-rating during earnings season, suggesting challenges in maintaining premium valuations observed earlier in July [4][9]. - **Pricing Power**: The report emphasizes that US Industrial pricing power is an underappreciated factor contributing to operational durability, which is expected to positively influence revisions and valuations in upcoming quarters [18]. - **Profitability from Tariffs**: Companies that capitalized on Trump 1.0 tariffs are now benefiting from excess backlog and improved value addition, which is expected to support pricing power in the second half of the year [9][18]. Notable Verticals - The strongest price increases are seen in sectors such as **Switchgear, Welding, Valves, Electrical Equipment, Pumps + Compressors, HVACR, Non-Residential Lighting, and Industrial Controls**. Companies like **Eaton (ETN), Acuity (AYI), Hubbell (HUBB), Rockwell (ROK), and others** are highlighted as favorable due to their pricing strategies [4][18]. - **Fastener PPI Data**: There is a noted disconnect between the muted Fastener PPI data and the strength observed in Fastenal (FAST), indicating potential market anomalies [4]. Historical Context - The analysis includes a review of pricing changes during the **2021-22 hyperinflation period**, revealing that no verticals have given back price increases in 2023-24 despite commodity deflation and a prolonged manufacturing recession [16][18]. Future Outlook - The expectation is that companies capable of ramping up volumes in the second half of the year will experience multiple expansions, indicating a more durable momentum into 2026 [9]. - The report suggests that the enhanced value addition and reshoring activities in the US will further support pricing power and profitability for the best-positioned companies [18]. Additional Considerations - The report includes a caution regarding the need for positive revisions to drive further upside in stock valuations, emphasizing that companies pushing the most price will likely fare better [4][9]. - The document also contains various disclosures regarding potential conflicts of interest and the investment banking relationships of Morgan Stanley with the companies mentioned [6][28][31]. This summary encapsulates the critical insights and data points from the conference call, providing a comprehensive overview of the current state and future outlook of the Multi-Industry sector in North America.

Investment Rating - The industry view is rated as Attractive [6] Core Insights - US Industrials are expected to drive broad margin upside into Q2 2025, with a forecasted sequential operating margin (OM) expansion of just 45 basis points (bps), significantly below the 105 bps average observed over the last decade, indicating a low bar due to tariff cost inflation concerns [3][9] - Companies best positioned for margin upside are those that are pushing prices early and decisively in Q2, particularly in industrial-facing categories with elevated metal content [3][4] - The report identifies several equities as attractive for Q2 margin beats, including Stanley Black & Decker (SWK), Allegion (ALLE), Trane Technologies (TT), Vertiv Holdings (VRT), and Eaton Corporation (ETN) [3][4] Summary by Sections Margin Outlook - The forecast for Q2 2025 indicates a conservative modeling of margins, with a focus on the delta between forecasted Q2 YoY margin expansion and realized Q1 YoY margins [3][13] - The report highlights that the ability to sustain pricing power and grow volumes will be critical for companies to maintain excess margins in the current cost environment [8] Pricing Power - US Industrial pricing power is viewed as an under-appreciated driver of operational durability, with companies realizing strong real EPS growth and healthy incrementals through inflationary periods [8] - The report emphasizes that the best-positioned companies for price increases include Eaton (ETN), Fastenal (FAST), Trane Technologies (TT), and others [8] Market Dynamics - The report notes that macroeconomic uncertainty is high heading into the second half of 2025, which may impact investor sentiment and company performance [3][4] - The cumulative percentage change in Producer Price Index (PPI) from May 2025 compared to February 2025 is tracked to capture tariff impacts, indicating strong pricing power in certain sectors [3][4]

Summary of Key Points from the Conference Call Industry Overview - **Industry**: Multi-Industry, focusing on North America - **Key Trend**: US Reshoring evidenced by a significant shift in global capital expenditure (capex) trends since 2018 [1][3][7] Core Insights - **US Capital Formation**: The US has gained approximately 200 basis points (bps) in global investment share since 2018, reversing decades of decline, with total global investment around $30 trillion annually [3][7] - **Incremental Capex Share**: The US has captured about 30% of incremental global capex since 2018, a nearly threefold increase compared to the period from 1999 to 2017 [7][8] - **Profit Growth Potential**: The US Industrial sector is expected to grow profits at an accelerated rate, with projections suggesting a potential 10x profit uplift due to favorable capex trends [3][8] Economic Drivers - **Policy Impact**: The Trump administration's tariffs and the COVID-19 pandemic have highlighted the need for supply chain resiliency, contributing to the reshoring trend [3][8] - **Trade Deficit Strategy**: The ongoing trade negotiations aim to address the $1.2 trillion trade deficit by increasing domestic production and investment, which presents opportunities for companies focused on the US market [8] Market Positioning - **Investment Recommendations**: Favorable outlook on US companies involved in capex, with specific recommendations for companies like Trane Technologies (TT), Eaton Corporation (ETN), Rockwell Automation (ROK), and Johnson Controls International (JCI) [8][70] - **Caution on International Exposure**: A more cautious stance on international investments due to uncertainties in capacity expansion when the US market is contracting [8] Additional Insights - **Manufacturing Disconnect**: Despite the US Manufacturing PMI being in contraction for over two years, the US Industrial coverage has shown healthy organic growth, indicating a disconnect from broader manufacturing trends [15][8] - **Historical Context**: The US has historically lost market share to China since its WTO entry in 1999, making the recent gains particularly significant [3][13] Conclusion - The US is experiencing a notable shift in capital expenditure trends, with implications for domestic production and investment strategies. The reshoring trend is expected to be durable, providing a favorable environment for US industrial companies to thrive in the coming years [3][8][7]

Investment Rating - The industry investment rating is Attractive [4] Core Insights - China exports have started to decline, with volumes down significantly year-over-year, indicating muted demand and well-stocked domestic US inventories [3][10] - The report suggests that the expected surge in imports during the 90-day tariff pause did not materialize, leading to lower US import volumes [7] - There is a potential shift in production to the US to avoid tariffs, which may support US manufacturing productivity and increase maintenance, repair, and operations (MRO) demand [7] - The report highlights risks to short-cycle production rates in the second half of 2025, particularly for companies that guided for stability or acceleration without acknowledging pre-buying [8] Summary by Sections China Exports - China maritime exports have shown a mild recovery from April lows but remain down year-over-year, reflecting a lack of urgency in US imports during the tariff pause [3][10] US Import Trends - US import volumes, particularly from LA and Long Beach, have decreased in May and June, suggesting a potential shift in supply chain strategies [12] Manufacturing and Production - The report indicates that US manufacturing capacity utilization has increased post-election, with a notable disconnect between ISM New Orders and Imports, suggesting a strategic relocation of production [7][17] - The report anticipates an extended capital expenditure upcycle in the US, benefiting from protectionist policies and resulting in strong backlogs for certain companies [8] Company-Specific Insights - Companies such as 3M, Lennox International, and Stanley Black & Decker are identified as most at risk for channel digestion in the second half of 2025 [8] - The report emphasizes a preference for US capital expenditure exposure, particularly in light of the current economic policies [8]

Investment Rating - The industry view is rated as Attractive [6] Core Insights - The report highlights that U.S. manufacturing sectors most tied to China imports present more opportunities than risks, particularly in the context of ongoing tariff negotiations and inflation concerns [3][8] - Companies that can push prices are better positioned to avoid negative revisions, with specific sectors like Electrical Equipment, Industrial Machinery, and HVACR showing positive potential for companies such as Eaton Corporation (ETN), Rockwell Automation (ROK), and Trane Technologies (TT) [3][8] - The report emphasizes that macroeconomic elasticity is shared across sectors, favoring companies that can increase prices despite potential volume losses [3][9] Summary by Sections U.S. Manufacturing Categories Tied to China - The report provides a detailed analysis of U.S. manufacturing categories and their reliance on China imports, indicating that consumer-facing sectors face headwinds due to high tariff exposure [3][8] Pricing Power and Competitive Positioning - Companies with significant tariff exposure can maintain operating profits even with volume losses, as demonstrated through comparative analysis of companies in the building products sector [9][10] - The report suggests that the ability to push prices is crucial for maintaining profitability in a challenging macroeconomic environment [3][9] Specific Company Ratings - Eaton Corporation (ETN) is rated Overweight, indicating strong potential for growth [63] - Acuity Brands Inc. (AYI) is also rated Overweight, reflecting positive outlooks for these companies in the current market [63] - Other companies such as Rockwell Automation (ROK) and Trane Technologies (TT) are similarly rated Overweight, showcasing their competitive advantages in the industry [63]