Investing.com -- Morgan Stanley revised ratings and price targets across Europe’s capital goods sector as part of its 2026 outlook, emphasizing balance-sheet capacity and earnings delivery after a broad share-price re-rating in 2025.
The brokerage said sector valuations now place greater weight on earnings execution, warning that “growth is still hard to come by” outside a narrow set of recovering end markets.
The brokerage projects average EPS growth of over 12% in 2026, compared with above 6% for 2025. It said sector costs are expected to rise 2.3% in 2026 and described the cost environment as “relatively benign,” supporting EBITA margins along with pricing recovery from tariffs.
Balance sheets across the sector “remain relatively strong” and can be used to support EPS growth through acquisitions, which the firm expects to increase versus 2025.
Multiple expansion has already occurred: capital goods shares re-rated 25% in 2025 on an absolute basis, leaving less room for further valuation expansion without earnings support.
The sector trades at 15.4x 2026 EV/EBITA, about a 10% premium to the 10-year average, and at a 24% P/E premium to MSCI Europe versus a 19% average premium over the past decade. Two-thirds of companies covered are trading at or above their 10-year average EV/EBITA.
The bank said performance will depend on select end-market improvement. It highlighted European residential construction, semiconductors capex and US industrial capex for recovery.
European residential permits are inflecting after a two-year downturn in Germany and France. Semiconductor capex is forecast to grow 12% in 2026, supported by record DRAM pricing. US industrial capex is showing “positive signs” with Dodge manufacturing starts improving.
Weaker segments include Process industries, chemicals capex is expected to decline 8% in 2026, and pharma 2%, along with Marine and European industrial production, which Morgan Stanley said remains structurally challenged.
Rating changes reflect the selective recovery view and the firm’s preference for “quality growth” names.
Atlas Copco, a Swedish industrial compressor and vacuum systems manufacturer, and Knorr Bremse, a German rail and commercial vehicle braking systems supplier, were upgraded to “overweight” from “equal-weight.”
Schindler, the Swiss elevator group, was raised to “equal-weight” from “underweight.”
Downgrades included GEA, the German processing equipment group, and Signify, the Dutch lighting supplier, both cut to “underweight” from “equal-weight,” while Rotork, the UK flow-control systems firm, was reduced to “equal-weight” from “overweight.”
Morgan Stanley added that European capital goods continue to trade at a 23% valuation discount to US peers, narrower than the 29% gap at the start of 2025.
The brokerage said earnings follow-through will be decisive after valuation gains, stating EPS growth must materialize to sustain performance into 2026.
