As US industrial companies prepare to report quarterly results, Truist Securities is telling investors to expect more guidance raises than cuts. The investment bank argues that steady demand tied to the electric grid and data centers should offset the drag from higher borrowing costs and pricier inputs like diesel.
The call runs against the recent mood in the sector. Industrial stocks have slipped in recent weeks on fears that the boom in power-hungry artificial intelligence infrastructure is cooling, just as the Federal Reserve's higher-for-longer rate stance makes financing expansions more expensive. Truist, however, says its recent checks with suppliers still point to broad, resilient demand.
Why power and data centers matter
The electric grid and data centers have become a major growth engine for industrial companies. Utilities, cloud providers and tech giants are all pouring money into new transmission lines, substations and server farms, which require transformers, switchgear, cooling systems and heavy equipment. That spending shows few signs of slowing, according to Truist, even as some other end markets soften.
Goldman Sachs recently raised its US data center capacity forecast, underscoring the scale of the buildout. And chipmakers tied to the AI boom continue to expand, with analysts expecting data center chip sales to double in the next few years. For industrial suppliers, that translates into a long runway of orders.
Input costs and rates are the counterweight
The optimism is not without caveats. Diesel prices remain elevated, and other raw materials have been creeping up, squeezing margins for manufacturers that cannot pass every cost increase along to customers. Higher interest rates also raise the cost of capital for both industrial companies and their customers, making big-ticket purchases more expensive.
Truist analyst Jamie Cook acknowledges these pressures but believes they are manageable. In a note to clients, Cook argued that the strength in power and data center demand is broad enough that management teams may still feel confident nudging their full-year guidance upward. When companies raise guidance, Wall Street analysts typically follow by lifting their earnings estimates, which can give a boost to share prices.
What it means for investors
For everyday investors, the Truist view is a signal that the recent selloff in industrial stocks may be overdone. If companies do raise guidance, it could provide a floor under the sector and even spark a rebound. But it also highlights the balancing act these firms face: strong demand on one side, rising costs on the other.
Investors should watch upcoming earnings calls for language about pricing power and order backlogs. A company that can raise prices without losing orders is in a strong position. One that has to absorb cost increases will see its margins shrink even if revenue grows.
The broader backdrop is also worth noting. The recent rise in oil prices has added to input cost worries, and any further spike could test the resilience Truist sees. On the other hand, if the Fed starts cutting rates later this year, that would ease financing costs and give industrials even more room to raise guidance.
The bottom line
Truist's call is a contrarian one in a market that has grown cautious on industrials. But it is grounded in a simple observation: the buildout of the electric grid and data centers is a multi-year trend that is not going to reverse overnight. For investors, the key is to separate the noise of quarterly cost pressures from the underlying demand story.
As earnings season gets underway, the proof will be in the guidance. If more companies follow Truist's script and raise their outlooks, the sector could regain its footing. If not, the selloff may have further to run.
