Industrials: Stocks Remain Fully Valued, but Selective Investment Opportunities Still Exist

The Morningstar US Industrials Index’s performance was largely in line with the US Market Index until the end of 2025, but the sector has outperformed the broader market in the last few months. Industrials benefited from the rotation away from software toward hard assets, but they have given up some of their relative gains in recent weeks amid geopolitical and economic uncertainties.

While we view the sector as fully valued, there are compelling investment opportunities across most industry groups, particularly in the farm, heavy construction machinery, and construction 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.

We expect fundamentals in the aerospace and defense industry to hold up relatively well, as healthy demand dynamics persist across both the commercial aerospace and defense markets. Aerospace will receive a boost from the doubling of the aircraft fleet over the next two decades, and the defense industry should benefit from increased defense spending amid a highly volatile geopolitical environment.

While some sectors, such as autos, remain highly exposed to tariffs, the industrial sector’s profitability remains robust despite this uncertainty. The recent geopolitical turmoil could negatively affect the sector’s fundamentals, given its effects on energy and raw material prices, supply chain disruptions, production constraints, and potential demand destruction. While we have not yet seen material disruptions, we think the sector is exposed to downside risk if the conflict intensifies.

Geopolitical turmoil in recent weeks could weigh meaningfully on the broader economy, consumer sentiment, industrial production, and the housing market. Rising oil prices and supply disruptions can have a considerable impact on inflation. These developments may force the central banks to tighten monetary policy to combat inflation concerns. These concerns are already having an impact, as mortgage rates have risen from 5.98% in late February to 6.22% as of the latest data in mid-March.

Top Industrial Sector Picks

CNH Industrial

• Fair Value Estimate: $20.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: Medium

CNH Industrial CNH is a global manufacturer of agricultural and construction equipment. In the long run, CNH 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 CNH’s returns and through-cycle financial profile. Though the performance gap relative to Deere remains wide, CNH has earned its seat at the table and will benefit from favorable long-term dynamics in global agricultural markets.

CarMax

• Fair Value Estimate: $99.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Narrow
• Morningstar Uncertainty Rating: High

CarMax KMX is the leading used vehicle retailer with over 250 stores, all in the United States. While we don’t expect a rapid stock price recovery, we like that CarMax is still devouring its own stock, 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 done a good job of messaging its robust omnichannel capabilities to consumers. Once it revamps its website and improves its messaging, we expect sales to rise.

Masco

• Fair Value Estimate: $88.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Medium

Residential repair and remodel spending drives Masco’s MAS sales, which surged during the pandemic but stalled in 2023. We continue to see a mid-single-digit-percentage long-term growth trajectory for R&R spending, and we expect the R&R market to benefit from several long-term secular tailwinds relating to aging housing stock and increased acceptance of smart home and energy-efficient products and solutions. We forecast Masco will consistently deliver mid-single-digit percentage revenue growth and high-teens operating margin. Our fair value estimate equates to 21 times our estimated 2026 adjusted earnings per share and a forward enterprise value/EBITDA ratio of 13 times.