This Week in Earnings – Q4'25

Industrial company commentary points to a cautiously constructive outlook heading into 2026, with demand holding up well in structurally supported end markets despite a mixed macro backdrop. Aerospace and defense remain clear demand leaders, supported by elevated backlogs, rising global defense budgets, and continued strength in commercial air travel, particularly at the premium level. Data center-driven power and electrical equipment demand is another standout, and companies are hopeful that transportation markets are beginning to show signs of improvement as tightening capacity could begin to support gradual recovery. Outside of these areas, industrial and residential end markets are seeing spots of green, though private non-residential construction remains under pressure.

Despite tariffs remaining a headwind in certain areas, most industrial companies expect margin expansion in 2026. Management teams broadly indicate that tariff impacts are now largely embedded in guidance and increasingly mitigated through pricing actions, sourcing adjustments, and cost controls. Pricing power, especially in aerospace, defense, and energy infrastructure, continues to outpace inflation, while improving supply chains and operating leverage further supporting margin recovery.

Operational execution continues to be a central theme, with companies emphasizing simplification, productivity gains, and cross-functional integration as key enablers of consistent performance. Efforts range from streamlining manufacturing processes and reducing complexity to investing in automation, digitization, and AI-driven workflows. These initiatives are already translating into improved delivery performance, higher workforce productivity, and better alignment between commercial, engineering, and supply chain functions, positioning companies to scale more efficiently as demand strengthens.

Capital allocation reflects this longer-term confidence, with elevated but disciplined growth capex planned across the industrial landscape, consistent with findings from our Q4’25 Inside The Buy-Side® Industrial Sentiment Survey®, where most respondents expect capex to increase. Investments are being directed toward capacity expansion, technology upgrades, and innovation / next-gen platforms, often tied directly to existing backlog and customer demand, while maintaining a focus on cash flow and returns.

Geographically, growth remains uneven: North America, the Middle East, and select emerging markets are providing support, Europe remains sluggish, and China appears to be stabilizing off low levels rather than rebounding, reinforcing a global environment defined more by resilience and selectivity than broad-based acceleration.

Key Themes

• Demand – Aerospace, Defense, and Data Center Demand Remain Strong; Transportation Sees Improvement; Select Green Shoots Emerge in General Industrial and Resi End Markets; and Pockets of Softness in Nonresi Persist
• Margins, Tariffs & Pricing – While Tariffs Remain a Headwind for Some, Most Expect Margin Expansion in 2026 as Impacts on Margins Are Largely Offset by Pricing Actions, Cost Discipline, and Operational Efficiencies
• Operational Excellence – Prioritizing Simplification, Cross-functional Integration, Cost Controls, Productivity-focused Investments, and Technology to Improve Execution and Position for Growth
• Capex – Elevated, but Disciplined, Growth Capex Levels Are Expected in 2026, Directing Multi-year Investments toward Capacity Expansion, New Product Development, and Next-gen Technologies While Balancing Cash Flow Generation and Return Objectives
• Around the Globe – Strength in North America, Middle East, and Select Emerging Markets Offsetting Ongoing Weakness in Europe and Parts of Asia; China Showing Signs of Stabilization and Gradual Improvement