European industrial companies are poised for a strong performance heading into the third-quarter earnings season, propelled by a dual surge in demand for artificial intelligence infrastructure and increased defense expenditures. This sector is demonstrating notable resilience and is projected to outperform other industries, signaling a significant trend in the continent’s economic landscape. Key players such as Siemens Energy, ABB, and Prysmian are at the forefront of this growth, capitalizing on the expanding need for electrification driven by AI data centers and broader infrastructure development.
AI and Defense Spending Catalyze Industrial Growth
The anticipated earnings growth for the MSCI Europe Industrials Index in the third quarter stands at 4.9%, notably outpacing the technology sector’s projected 4.2% and communication services at 3.3%. This outperformance is largely attributed to companies involved in electrification, which are experiencing a significant uplift in sales and revenue. The proliferation of AI adoption and the subsequent construction of data centers are directly fueling this demand. Analysts project that the capital goods segment, a core component of the industrial sector, could see as much as 15% earnings-per-share (EPS) growth for the quarter. This robust expansion is partly driven by the strategic initiatives of major firms.
ABB, a leader in automation, is actively collaborating with Nvidia Corp. to develop advanced AI data centers. Meanwhile, Italian cable manufacturer Prysmian has seen its price targets revised upward by UBS Group AG due to its significant exposure to the burgeoning U.S. data center market. Citigroup analyst Vivek Midha has further indicated that Prysmian is likely to issue a guidance upgrade, emphasizing the durability of the products driving its success. Siemens Energy is also experiencing substantial benefits, with analysts noting “unprecedented order momentum and solid execution.” Bloomberg Intelligence analysts forecast that the company might elevate its medium-term targets when it reports its fiscal fourth-quarter results, driven by robust demand for its gas turbines and grid technologies. Beyond AI, increased defense spending is also bolstering performance, with manufacturers like Rheinmetall AG, Thales SA, and Leonardo SpA expected to report strong fiscal year results.
Market Resilience Amidst Global Headwinds
Despite a generally cautious outlook for the broader Stoxx Europe 600 index, analysts have raised their estimates for European industrial and financial companies. This divergence highlights the specific strengths within the industrial sector. Strategists suggest that this outperformance could persist through 2026, contingent on sustained investment in electrification and defense. Data indicates that the MSCI Europe Industrials Index has outperformed the overall MSCI Europe Index since October 2024. Additional impetus may come from significant infrastructure investments in Germany and potentially lower interest rates that could benefit the construction sub-sector.
However, the industrial sector is not without its challenges. Weak industrial production figures in Germany for August, showing a 4.3% month-on-month decline, could impact companies in automotive and industrial technology divisions, such as SKF AB, Atlas Copco AB, and Siemens AG. The ongoing U.S.-China tariff disputes also present a risk, potentially affecting demand and pricing for European manufacturers. There is concern that some firms may have front-loaded sales to mitigate tariff impacts, creating uncertainty for the latter half of the year. Escalating trade tensions could further diminish Chinese demand for European goods and enhance the competitiveness of domestic Chinese firms. Furthermore, Swedish industrial companies face headwinds from a strong domestic currency and a weak U.S. dollar, which can negatively impact export revenues and profit margins.
Lucas turns raw market data into actionable strategies, spotting trends in a heartbeat. With 9 years managing portfolios, he treats market volatility like a surfer riding big waves—balance and timing are everything. On weekends, Lucas hosts “Bull & Bear Banter” podcasts, showing that finance discussions can be as entertaining as they are informative.