Data Centers and Infrastructure Buoy Construction Sector Amid Housing Slump, Morgan Stanley Says

The construction sector is seeing a significant boost from booming demand for data centers and infrastructure projects, which is helping to counter a pronounced downturn in residential markets, according to a new analysis by Morgan Stanley. The firm's research, based on second-quarter corporate earnings calls, points to a clear divergence in performance across the industry's end markets.

Key Findings from Corporate Commentary

Morgan Stanley detailed its findings in a chartbook released Wednesday, which utilized a large language model to parse commentary from 28 companies. The analysis identified 164 specific mentions of end markets, providing a broad sentiment reading from corporate leadership.

Of these citations, 116 indicated positive or improving conditions, while only 41 pointed to weakening or sluggish trends, the report stated. Data centers and infrastructure were consistently highlighted as the most robust areas of growth, with the broader U.S. non-residential market showing what the firm described as "constructive momentum."

A Tale of Two Markets: Commercial vs. Residential

The analysis revealed a stark contrast between commercial and residential construction, with housing markets facing significant headwinds in both the U.S. and Europe. U.S. repair and remodel activity was described as leaning positive, but new residential construction sentiment was deeply negative.

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Key regional breakdowns from the report include:

• U.S. Residential: Showed the most significant weakness, with 83% of corporate comments indicating deterioration, resulting in a net improving breadth of -65%.
• European Residential: Also trended negative, with a net breadth of -13%.
• European Non-Residential & Remodels: Commentary was more balanced, posting positive net breadth of 20% and 36%, respectively.

Sector Outlook and Stock Preferences

Despite the mixed performance, Morgan Stanley noted that most companies maintained their financial guidance for the year. However, the firm cautioned that cost headwinds were offsetting some of the benefits from positive pricing outcomes across the sector.

Based on its analysis, the investment bank identified several preferred European stocks, including lightside construction firms Saint Gobain, Kingspan, and Rockwool. Conversely, the firm is least constructive on heat pump makers Nibe and Ariston, as well as Geberit, citing its high valuation, and Wienerberger, due to perceived earnings risks.