Automation chain readings are the strongest, while construction and process industries face rising risk ahead of the 1Q26 earnings season

Overview

This report is Morgan Stanley's weekly update on European capital goods, using early disclosures from companies and industry data such as Yaskawa, Sika, Sulzer, Fastenal, VAT, and Acuity to assess the 1Q26 capital goods earnings season. The core conclusion is that automation demand is the strongest, construction demand is regionally mixed, process industries are weaker due to Middle East project delays and order-cycle effects, and price-cost pressure remains unresolved on the distribution side. The report overall maintains an In-Line industry view, but tactically favors Siemens and ABB at the stock level, while also viewing Atlas Copco, Epiroc, Schneider, and others as important OW ideas for 2026, while flagging 1Q risks for Signify, Assa, Kone, Wartsila, and others.

Core views

The clearest positive readings come from automation: Yaskawa motion control orders rose 47% YoY, while Japan machine tool orders and Airtac sales were also strong, supporting the view that Siemens Digital Industries FY2Q26 orders could reach about €5.3bn, 13% above the roughly €4.7bn consensus. In construction, Sika still posted about 1.5% organic growth in EMEA, but commercial and residential markets in the Americas are weak, and Acuity Lighting revenue growth turned to -2.8%, leading the report to remain cautious on Signify, Assa Abloy, and Kone. In process industries, Sulzer's negative order growth and Middle East project delays are a negative read-across for Rotork and Alfa Laval Energy. In semiconductor capital equipment, strong VAT order growth keeps the report confident that Atlas Copco Vacuum Technique still has order upside potential. In distribution, Fastenal's gross margin was squeezed by tariff costs, weakening the case for Rexel North America's margin expansion.

Analysis framework

The report uses early-disclosure read-across from reporting companies to mapped European capital goods names: it tracks Siemens automation with Yaskawa, machine tool orders, and Airtac; observes construction demand through Sika and Acuity; watches process industry orders through Sulzer; assesses Rexel's price-cost and gross margin pressure through Fastenal; infers Atlas Copco Vacuum Technique from VAT order growth; and then combines valuation, EPS growth, relative ratings, and risk-reward charts to form stock allocation recommendations.

Methodology notes

• read_acrossEarly-disclosure company read-across mapping

  Use companies that have already reported earnings or monthly orders as leading signals to infer earnings risk for companies in the same end market that have not yet reported.

  The report maps order, revenue, and gross margin data from Yaskawa, Sika, Sulzer, Fastenal, VAT, and Acuity to European capital goods companies such as Siemens, Assa, Kone, Rotork, Rexel, Atlas Copco, and Signify.

• relative_ratingMorgan Stanley relative rating framework

  Overweight, Equal-weight, and Underweight represent recommended weights relative to the market or coverage group, and are not the same as Buy, Hold, or Sell.

  The report uses OW/EW/UW to express relative stock views, provides key OW and key UW lists, and also discloses an In-Line industry view.

• scenario_analysisSiemens Digital Industries order scenario analysis

  Extrapolate Siemens automation hardware orders by comparing the quarter-on-quarter strength of Yaskawa motion control orders with historical seasonality.

  Based on this, the report derives a Siemens Digital Industries FY2Q26 order scenario of about €5.3bn, 13% above the current consensus of about €4.7bn.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Siemens

  Beneficiary of positive automation read-across

  Strengths

  Yaskawa, Japan Machine Tool Orders, and Airtac data all show improving automation demand, supporting upside to Digital Industries orders versus expectations.

  Weaknesses

  The estimate depends on read-across mapping and scenario assumptions; the actual software, hardware, and regional mix may affect order realization.

  Comparison

  The report believes Siemens Digital Industries FY2Q26 orders could be 13% above consensus.

  Risks

  If April trends weaken or orders do not translate into profit, the tactical positive stance ahead of earnings could be undermined.

• Atlas Copco

  Positive read-across target from strong VAT orders

  Strengths

  VAT order growth has historically correlated with Atlas Vacuum Technique, and the report believes Atlas VT 1Q26 orders could come in meaningfully above consensus.

  Weaknesses

  Atlas order cyclicality is lower than VAT's, and historical correlation does not imply perfect synchronization.

  Comparison

  Consensus expects Atlas VT 1Q26 organic order growth of 16.5%, while the report sees upside potential toward about +30% YoY.

  Risks

  Semiconductor capex timing or vacuum equipment order conversion may fall short of expectations.

• Signify

  Risk exposure to weak construction and professional lighting readings

  Strengths

  Margin pressure could ease if cost savings or pricing execution improve.

  Weaknesses

  Acuity Lighting growth turned negative, and the report expects Signify's 1Q26 organic revenue to remain similar to the roughly 5% decline in 4Q25, with EBITA forecast 18% below consensus.

  Comparison

  Acuity ABL turned from positive growth to -2.8% YoY and is viewed as a negative peer read-across for Signify.

  Risks

  US construction project delays, pricing headwinds, insufficient efficiency, and inadequate cost savings may continue to pressure profits.

• Rexel

  Exposure to both distribution price-cost pressure and copper prices

  Strengths

  Higher copper prices could lift 2026 sales growth by about 2 percentage points above the existing low- to mid-single-digit guidance.

  Weaknesses

  Fastenal's gross margin compression shows pricing did not cover costs, limiting room for Rexel North America's gross margin expansion.

  Comparison

  Rexel North America's gross margin has historically moved in the same direction as Fastenal's, but at a lower absolute level.

  Risks

  Delayed recovery in construction volumes, limited improvement in non-cable pricing, and a higher hurdle to beating 2026 EBITA margin expectations.

• Kone

  Risk exposure to Middle East and construction demand

  Strengths

  There are still some positive signals from European residential permits, and low-single-digit sales growth may still be maintained.

  Weaknesses

  The report notes that about 6% of Kone's revenue is exposed to the Middle East, and comments from Otis together with read-across from Sika and Sulzer both increase caution.

  Comparison

  The report lists Kone as one of its key Underweights.

  Risks

  Middle East order or project delays and weaker construction demand could lead to 1Q26 results missing expectations.

• Rotork

  Risk exposure to delays in process industry and water/O&G projects

  Strengths

  If orders recover in 2H26 as Sulzer management expects, the read-across pressure may ease.

  Weaknesses

  Sulzer's 1Q26 orders slowed materially, and delays in water and chemical projects create a negative mapping for Rotork's process exposure.

  Comparison

  The report says this read-across is cautious for Rotork and may also affect Alfa Laval Energy.

  Risks

  Middle East project delays, postponed oil and gas and water orders, and a slower-than-expected recovery in process industry orders.

Key data

• Yaskawa motion control order growth+47% YoYDec-25 to Feb-26 quarter, serving as a positive read-across for Siemens Digital Industries.
• Siemens Digital Industries FY2Q26 order scenario€5.3bn; 13% above consensusThe report estimates consensus at about €4.7bn.
• Sika Europe organic revenue growth+1.5%1Q26, relatively stable in Europe, but commercial and residential markets in the Americas are weak.
• Sulzer 1Q26 order growthabout -8.6% to -9%The report says delays in Middle East water and chemical projects affected orders.
• Fastenal 1Q26 pricing and gross marginPricing +3.5% YoY; gross margin -50bps YoYPrice increases did not fully offset tariff-related costs, affecting the read-across for Rexel.
• Rexel non-cable pricing expectation1.6% in 1Q26, 0.9% in 4Q25The improvement is still weaker than the roughly 2-3% price increases at Schneider and Legrand.
• VAT read-across for Atlas Copco Vacuum TechniqueAtlas VT orders may be +30% YoY; consensus +16.5%The report believes strong VAT orders support upside risk to Atlas Copco orders.
• Acuity Brands Lighting growth-2.8% YoYTurned negative from +1% in the previous quarter, creating a cautious read-across for Signify.
• Signify 1Q26 EBITA forecast gap18% below consensusThe report is concerned about no improvement in organic growth, insufficient efficiency, inadequate cost savings, and pricing headwinds.

Impact & implications

The investment implication is that cyclical risk in the 1Q26 capital goods earnings season needs to be taken more selectively. Order readings in automation and semiconductor equipment are more supportive of long positions in Siemens, ABB, and Atlas Copco-related names; however, risks are higher in construction, process industries, and the distribution price-cost chain, especially for Signify, Assa Abloy, Kone, Rotork, Rexel, and some companies exposed to energy process orders. As many capital goods stocks have already returned to pre-conflict price levels, the report emphasizes that earnings tolerance is limited, and April trends, price-cost dynamics, and the quality of order recovery will be key validation points.

Risks

• Many capital goods share prices have already returned to pre-conflict levels, reducing tolerance for 1Q26 earnings misses.
• Weak US commercial and residential construction demand and project execution delays could weigh on Signify, Assa Abloy, Kone, and Rexel.
• Middle East project delays are affecting read-across from Sika, Sulzer, and others, and could transmit to Kone, Rotork, and Alfa Laval Energy.
• Insufficient pass-through of tariff-related costs into pricing could compress gross margins for distribution and industrial companies.
• Positive read-across in automation and semiconductor equipment depends on order mapping; if actual orders or profit conversion disappoint, the tactical bullish view may fail.
• The report discloses that Morgan Stanley has investment banking, shareholding, or service relationships with many covered companies, and investors should consider potential conflicts of interest.

What to watch

• Whether Siemens FY2Q26 Digital Industries orders come close to the €5.3bn scenario, and the earnings reaction on May 13.
• Validation from late-April 1Q26 results of ABB, Sandvik, Alfa Laval, Metso, and others regarding automation, machinery, and process industries.
• How Sika, Acuity, and subsequent construction-chain companies describe delays in US commercial/residential projects.
• Rexel's 1Q26 non-cable pricing, the boost from copper prices to sales growth, and 2026 EBITA margin guidance.
• Whether Atlas Copco Vacuum Technique's 1Q26 order growth comes in materially above the 16.5% consensus forecast.
• Whether Middle East orders and project execution recover in 2H26.
• Signify's 1Q26 organic growth, EBITA margin, and delivery of cost savings.