The Morningstar US Industrials Index slightly outperformed the broad market in 2025 as the economic outlook improved during the fourth quarter and the Federal Reserve continued to ease monetary policy. While we view the sector as fully valued, there are compelling investment opportunities across most groups, particularly in the farm and heavy construction machinery industries. We see the opportunity for new technologies to transform the farming equipment industry, resulting in less cyclicality and higher margins over the business cycle. While agricultural data remains mixed, the US Department of Agriculture forecasts inflation-adjusted farm income will increase by 37% this year, which bodes well for farm equipment manufacturers.
Industrials Has Performed in Line With the Broader US Market
We expect fundamentals in the aerospace and defense industry to hold up relatively well, as healthy demand dynamics persist across these markets. We maintain our view that the global commercial aircraft fleet will nearly double over the next two decades, driven by secular growth and the replacement of older, less-efficient aircraft.
We Still See Selective Investment Opportunities Across Most Industry Groups
While some sectors, such as automobiles, are still highly exposed to tariffs, the sector’s profitability remains robust despite tariff-related uncertainty. Reshoring efforts are a tailwind, and an easing monetary cycle will further support fundamentals in 2026. In our view, firms with strong pricing power tied to intangible assets and/or customer switching costs have been successful at raising prices to mitigate tariff costs. Companies have also been actively reducing costs and reorganizing supply chains to minimize the impact of tariffs.
Industrial Production in the US Remains Resilient
Industrial production has recovered from the pandemic lows, and non-residential construction has accelerated significantly in the United States. This upward inflection is closely tied to infrastructure bills and reshoring efforts. We expect policy-related tailwinds, elevated construction volume, easing monetary cycle, and robust capacity investments to support strong revenue growth for industrial companies over the next five years.
US Construction Spending Has Surged Over the Past Five Years
Top Industrial Sector Picks
CNH Industrial
- Fair Value Estimate: $20.00
- Morningstar Rating: ★★★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: Medium
CNH CNH is a global manufacturer of agricultural and construction equipment. In the long run, the firm will face steady (if not increasing) demand for its solutions to help feed a growing global population. Moreover, margin-rich technology add-ons to its product portfolio will continue improving its returns and through-cycle financial profile. Though the performance gap versus Deere remains wide, CNH has earned its seat at the table and will benefit from favorable long-term dynamics in global agriculture markets.
CarMax
- Fair Value Estimate: $99.00
- Morningstar Rating: ★★★★★
- Morningstar Economic Moat Rating: Narrow
- Morningstar Uncertainty Rating: High
With over 250 stores across the US, CarMax KMX is the leading used vehicle retailer. We don’t expect a fast stock price recovery, given the question of who will be the next CEO, but we expect that person to be outside the auto industry and a veteran of digital commerce. We like that CarMax is still devouring its own stock while it looks for a new leader, and the share count is nearly 40% lower than in fiscal 2013. CarMax has not resisted the shift to online retailing, but we think it has not effectively communicated its robust omnichannel capabilities to consumers. Once it revamps its website and improves its messaging, we expect sales to rise.
Idex
- Fair Value Estimate: $212.00
- Morningstar Rating: ★★★★
- Morningstar Economic Moat Rating: Wide
- Morningstar Uncertainty Rating: Medium
Idex IEX manufactures a wide array of products, ranging from DNA sequencing equipment to wastewater pumps to Jaws of Life hydraulic rescue tools. The firm differentiates itself by producing highly engineered products for a variety of niche markets, where it typically holds the number-one or number-two market share position. We believe that the long-term growth drivers in the semiconductor and life sciences end markets remain intact. Therefore, we believe that investors will be rewarded once the cyclical headwinds subside and Idex returns to more normalized organic revenue growth.
