Artificial intelligence and data centers are in the spotlight, but investors should pay attention to a less-noticed boom in global manufacturing. By Reshma Kapadia
Novartis started construction this year on a 700,000 square foot manufacturing hub in North Carolina as part of the Swiss drugmaker's $23 billion investment in U.S. manufacturing and research and development.
South Korea's Hanwha Group is expanding the former Philadelphia Naval Shipyard with a $5 billion investment to help rebuild U.S. shipbuilding. In India's Kutch desert, wind turbines, solar arrays, and high-voltage transmission are being installed, creating the world's largest renewable-energy park as the country looks to reduce its reliance on foreign oil.
As data centers and artificial intelligence dominate the headlines, a less-noticed building boom is under way, stretching across the globe as nations attempt to jump-start their industries in a bid to bolster national and economic security. This new global industrial cycle is sparking demand for building materials and equipment on construction sites, commodities needed for renewable energy and power grids, engineering services, and the automation and industrial components to build new factories -- or retool existing ones. All of that spells opportunity for investors.
"We have four to five simultaneous capex booms," says Steve Chiavarone, deputy chief investment officer at Federated Hermes, who sees this infrastructure buildout as the biggest since the U.S. railroads in the late 19th century. In addition to data centers, that includes upgrading national power systems, shifting production to the U.S. to avoid tariffs, and modernizing factories. All of that calls for upgrading basic infrastructure, such as ports and bridges.
The U.S.-China rivalry and Covid pandemic during the first Trump administration spurred discussions about diversifying supply chains away from China. But last year's global tariffs, China's successful use of its rare-earth dominance as leverage in trade talks, and another series of conflicts have kicked these efforts into higher gear. That in turn has fueled a race by countries to diversify their energy sources and reconfigure supply chains, especially for critical materials such as rare-earth magnets or the foundational chemicals needed for drugs.
"Security is increasingly the industrial policy -- across the board," says Benjamin Bahr, a fund manager at First Eagle Investments. "Since Trump's second term, geopolitics and demands have accelerated. With two major geopolitical conflicts that have impacted logistics and the massive increase in demand from AI and electrification, spending has gone from a policy idea to necessity."
The U.S. unveiled a $12 billion public-private partnership this year that includes investments in companies like MP Materials to ease China's stranglehold on rare earths needed for everything from cars to weapons. Japanese Prime Minister Sanae Takaichi is proposing $2.3 trillion in investments across 17 sectors to revitalize Japan's economy, with an eye toward security.
The European Union has proposed an 800 billion euro ($914 billion) package for rearmament and infrastructure. India, hit hard by the Iran war, is expected to invest $170 billion this year to bolster its energy resilience with grid improvements and investments in nuclear and solar energy.
Investors are catching on. The State Street Industrial Select Sector SPDR exchange-traded fund is up about 20% over the past year. Industrials are trading at a mid- to high-single digit premium to the S&P 500 rather than in line, as they typically have done. That's partly because manufacturing is coming out of a funk as the U.S. emerges from a 25-year decline in U.S. manufacturing capital spending. Chris Snyder, Morgan Stanley's head of U.S. multi-industry research, expects an incremental $10 trillion in spending in U.S. manufacturing over the next two decades. And that's before factoring in the spending for data centers.
The spending would translate to the U.S. industrial economy going from almost no growth to 3%-plus annual growth, Snyder says. That sets up a favorable backdrop for stocks that could push valuations roughly 30% higher, adds Snyder.
Jefferies industrials analyst Stephen Volkmann likens this industrial arms race to the 1960s with the buildout of the Eisenhower highway system and a manufacturing construction boom amid Cold War spending on defense and space, technological modernization, and suburbanization.
Flush Factories
The U.S. ISM Manufacturing Purchasing Managers' Index hit 54 in May, its highest point since mid-2022 and the fifth-straight month in expansion territory. Global manufacturing PMI is nearing its strongest readings in recent years at 52.2 in June, and Morgan Stanley's Asia Pacific strategists see Asia entering its strongest industrial cycle since the early years of this century.
Any pullback in AI investment would hit many companies -- and likely the broader market. But fund managers expect the spending related to national security, self-reliance, and infrastructure upgrades to remain critical for the resilience countries are seeking.
Strategists think this industrial cycle will have long legs. As governments invest, they create incentives for others to join. Venture-capital firm Andreessen Horowitz launched an American Dynamism practice to focus on defense, manufacturing, and aerospace start-ups bolstering the country's economic security.
JPMorgan Chase launched a $1.5 trillion Security & Resiliency Initiative that aims to make direct equity investments to help fill the holes in sectors critical for national security. That includes robotics, pharmaceutical precursors, and rare-earths, plus frontier technologies like AI, quantum computing, and cybersecurity. Also in this bucket: defense technology, battery storage, and ways to make the power grid more resilient.
Some beneficiaries, like European defense companies, have had a strong run and may be in for a breather. Others, like South Korea and Japanese industrials that have become dominant in automation, robotics, and shipbuilding, are well positioned for this industrial revival. They are worth keeping on a watchlist if there is a pullback in the AI-oriented hype that is driving their broader markets higher.
The fund industry has jumped in with new products such as the $291 million Tema U.S. Manufacturing & Reshoring ETF (ticker: WELD), geared toward mid-cap stocks and up 31% year to date. Two older and broader infrastructure ETFs are among the ones seeing the most inflows, according to MorningstarDirect: the $13.9 billion Global X U.S. Infrastructure Development $(PAVE)$ and the $4.5 billion iShares U.S. Infrastructure $(IFRA)$.
Building Blocks
Sam Klar, who manages the actively managed GMO Domestic Resilience ETF, says investors aren't fully appreciating the potential winners. He cites companies facilitating the building like Jacobs Solutions, an engineering and construction firm managing complex projects such as a new biologics facility manufacturing GLP-1 drugs in North Carolina.
Concerns the company could see AI cannibalize parts of its business have hit the stock, which is trading at a 20% discount to the market. But Klar sees the AI fears as misplaced and expects double-digit earnings per share growth over the next five years. "They are in a perfect place for the reindustrialization of America because they help build complex stuff with precision engineering that is not easily replaced by AI," Klar says, adding that the company has raised its earnings per share guidance and has been buying back stock amid the volatility.
Among the most basic beneficiaries of a building boom are companies providing the aggregates for construction, such as Martin Marietta Materials, which recently agreed to a $13.5 billion acquisition of Lhoist North America, to create the biggest lime and limestone producer. The acquisition should bolster Martin Marietta's profitability and exposure to a reindustrialization that isn't fully appreciated by the market, says Philip Ng, Jefferies building products analyst. "For an industry where volumes have been flat but the company has had a lot of pricing power, this reindustrialization opportunity could generate 3%-plus growth on volumes alone," he says.
Plus, the company gets only 5% of its business from data-center buildout and another 5% related to power infrastructure that also helps support AI, Ng says. Even if there is a pullback in that spending, analysts note that much of the money from the infrastructure bill signed during the Biden administration still has to be spent to upgrade highways, tunnels, and bridges, continuing to feed demand.
Copper is a critical commodity for the electrification and digitization of the economy, needed for the power grid upgrades required to support a manufacturing revival. Grupo Mexico is home to Mexico's largest freight railroad and copper mining business through an 89% stake in Southern Copper, which has low-cost copper mines in Mexico and Peru and projects lined up to expand copper production by 50% by 2035.
Grupo Mexico stock trades at a 37% discount to Southern Copper and allows investors to get access to Mexico's rail network -- another beneficiary of manufacturing moving away from China and into Mexico -- essentially for free. Plus, the company is net cash positive, generating enough cash to fund its operations. "If national security means rebuilding physical capacity, copper is one of the first bottlenecks you run into," Bahr says. "Grupo Mexico owns the input everyone needs before the factories, grids, and data centers can get built."
Beyond Data Centers
Equipment rental companies such as United Rentals and WillScot Holdings are leading indicators of manufacturing activity. WillScot's mobile offices, for example, are often the first and last thing on a construction site. Both companies reported a pickup in orders in recent earnings calls. WillScot said the 8% order growth for its modular units in the first quarter beat its internal expectations. United Rentals Chief Executive Matthew Flannery highlighted strength in orders related to industrial, power, mining, and minerals as a "wide variety" of new projects, from healthcare to power, got off the ground, adding that the momentum "is a lot broader than just data centers." Both stocks trade around 20 times 2027 earnings. Analysts expect 14% earnings growth next year for United Rentals and 23% growth for WillScot.
The new manufacturing being built in the U.S. and developed world is likely to lean heavily on automation. That's one reason Rockwell Automation is a top pick for Morgan Stanley's Snyder, who favors companies facilitating the supply-chain migration and building American industrial capacity over manufacturers themselves.
Rockwell is likely to see the benefits of industrialization faster, since companies look to retool or expand existing plants before breaking ground. The focus on national security likely means some of Rockwell's Chinese rivals won't be competing for the same business in the U.S., Snyder adds. The stock trades at 32 times earnings, a premium to the market. But Snyder says the valuation is near where it traded during past periods of strong orders in 2018 and 2021, yet its earnings outlook is better.
"It's unclear why the stock should trade at a discount to its own history when the market growth outlook and company execution has improved," he adds. And as U.S. manufacturing capital spending returns from two decades of flatlining, Snyder sees longevity to Rockwell's growth, which he thinks underpins the case for a higher valuation.
Asia's Advantage
Among the best places to tap this industrial boom globally is in Asia -- especially South Korea and Japan. They have been building their industrial capacity for years as the U.S. and others focused elsewhere. That makes their companies appealing partners for Western companies that might be trying to reduce their reliance on Chinese companies in critical areas.
South Korean defense companies Hanwha Aerospace and LIG Defense&Aerospace are seeing an influx of orders and multiyear backlogs amid demand from the Middle East and Europe, says Ian Chun, a senior research analyst at Sands Capital. South Korea has emerged as the second-largest arms dealer to Europe after the U.S.
Many industrial Korean companies are standouts in their niches. Hyosung Heavy Industries makes ultrahigh-voltage transformers needed in electric transmission and within the broader electric value chain -- something few companies produce, Chun says. The company has a foothold in the U.S. that has helped it emerge as a trusted supplier and gain market share. While orders may take longer to build, Doosan Enerbility is one of a handful of companies outside of Russia and China that can provide a critical component for the buildout of nuclear energy in Western countries.
The broad-based iShares MSCI South Korea ETF has about a fifth of its assets in industrials, including Hyosung Heavy and Doosan, giving U.S. investors an easier way to get into these companies. South Korea's Kospi Composite index is up 61% this year, fueled by excitement over memory giants SK Hynix and Samsung Electronics and momentum-driven retail investors.
While analysts don't see the valuations for many of these industrials as too rich, the market is susceptible to volatility. Strategists see a pullback as a chance to buy. "We are talking about multiyear trends that are showing developed countries that they have to promote their own industry -- and that is a durable trend," says Matt Gertken, chief geopolitical strategist at BCA Research.
Write to Reshma Kapadia at reshma.kapadia@barrons.com
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July 24, 2026 21:31 ET (01:31 GMT)
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