2026-01-08 10:42Summary of the UBS Multi-Industry Outlook for 2026 Industry Overview - The report focuses on the US Electrical Equipment & Multi-Industry sector, projecting a strong performance in 2026, similar to the previous year where the XLI index rose by 18% compared to the S&P's 16% [3][71]. Core Insights - Earnings Growth: Multi-Industry companies are expected to grow earnings by 12% on average in 2026, with limited risk of valuation de-rating, which should lead to higher equity values [3][15]. - AI Infrastructure Spending: Anticipated to increase by 60% over the next two years, with a 33% growth specifically in 2026. This spending is a key driver of equity values and order backlogs for many Multi-Industry companies [8][20]. - Macro Economic Factors: Lower interest rates combined with increased AI infrastructure spending may lead to further multiple expansion in 2026, although there are risks of inflation and overheating in 2027 and beyond [5][40]. Stock Recommendations - Upgrades: DOV and EMR have been upgraded to "Buy" due to optimism regarding non-AI capex spending. DOV is expected to see organic growth after two years of challenges [6][10]. - Downgrade: ETN has been downgraded to "Neutral" due to limited margin expansion opportunities and a lack of positive revisions in the near term [6][13]. Financial Health Indicators - Consumer and Corporate Balance Sheets: U.S. household net worth is at a record $176 trillion, with liabilities at 11.9% of net worth, below the long-term average of 14.5%. This indicates strong financial health and limits stress on equity values [40][43]. - Corporate Balance Sheets: Net equity for U.S. corporates reached $68 trillion as of Q3 2025, the highest ever, suggesting strong capital deployment opportunities [46][47]. Capital Expenditure Insights - Hyperscaler Capex: Continued growth in data center capacity investment is expected, with a 35% increase in planning stages noted in Q3 compared to Q1, implying an additional $1.7 trillion of capex [20][21]. - Non-Hyperscaler Capex Recovery: There is potential for recovery in non-AI capex, particularly in industrial and manufacturing sectors, which could benefit from favorable tax policies [26][33]. Market Sentiment and Future Outlook - Gradual Recovery: Companies are beginning to see signs of gradual recovery in industrial business, with positive sentiments from distribution channels and improved order volumes [32]. - Consensus Earnings Forecast: The consensus for earnings growth remains modest, with median EPS growth rates of 11-12% for EE/MI companies over the next two years, reflecting a cautious outlook [71][72]. Additional Considerations - Residential HVAC Market: Limited growth potential is anticipated in residential HVAC shipments over the next three years due to excess shipments during 2020-2024 [59][63]. - LTL Shipments: Monitoring of less-than-truckload (LTL) volumes is crucial as they serve as early indicators of industrial activity, which remains weak due to high exposure to housing markets [53][54]. This comprehensive outlook indicates a positive trajectory for the Multi-Industry sector in 2026, driven by robust AI infrastructure spending and strong balance sheets, despite some caution regarding broader economic conditions and specific market segments.