ab 14 August 2025 Global Research US Equity Strategy The Theme-ometer: Signs of improvement for less favored themes A market of themes We leverage our REVS framework on a suite of thematic equity stock lists to objectively assess which themes should be more or less favored. REVS is our quantamental stock selection framework. Our philosophy is that stock prices are impacted by the macroeconomic regime (R), the operating environment for earnings (E), the market assessment of valuations (V), and sentiment (S). ...

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 view is rated as Attractive, with specific companies like ALLE, LII, MMM, and WSO being analyzed for their performance and outlook [6]. Core Insights - The report anticipates modest Q1 earnings beats, but emphasizes that outlooks will significantly influence equities, particularly focusing on April demand commentary and price/cost dynamics for the rest of the year [2]. - There is a strong emphasis on pricing power as a key factor for companies to navigate through tariff uncertainties, with a belief that those able to push prices will fare better in terms of near-term revisions [13][19]. - The report highlights a shift in activity towards US Industrials due to reshoring trends, suggesting that US companies are well-positioned to capture a larger share of global capital expenditure [68]. Summary by Sections Company-Specific Analysis - **ALLE**: The consensus modeling is viewed as conservative for Q1 but aggressive for the rest of the year, with expectations of a modest Q1 EPS beat driven by residential construction dynamics [78][79]. - **LII**: Expected to see a strong beat in Q1, but with a fade in performance anticipated due to difficult comparisons in the second half of the year [6]. - **MMM**: Identified as a top risk due to tariff pre-buy concerns, with a projected Q2 growth of 5% quarter-over-quarter, which is considered aggressive [6]. - **WSO**: Positioned well to achieve pricing power and potentially positive revisions if it can maintain high gross margins amidst tariff inflation [6]. Macro Environment and Trends - The report discusses the impact of tariffs on production and project activity, noting a slowdown in project activity due to uncertainty, while production is expected to continue [9][31]. - It highlights that the US accounts for approximately 30% of global consumption, which provides a competitive advantage for US manufacturers in the face of international competition [9]. - The report indicates that the preference for industrial over consumer exposure is driven by a more capital-intensive world, suggesting a positive outlook for industrial sectors amidst rising inflation [10][20]. Pricing Power and Market Dynamics - The report emphasizes that companies with strong pricing power are likely to perform better in the current macroeconomic environment, where uncertainty is prevalent [13][16]. - It notes that pre-buys are generally negative indicators, as they signal a potential decline in future demand, particularly for companies heavily reliant on international sales [41][45]. - The analysis suggests that the ability to maintain price/cost neutrality will be crucial for companies as they navigate through tariff implementations [13][41].