Stocks in the construction and industrial sectors are set to soar as a 'red hot capex cycle' kicks in, Morgan Stanley says

• As demand continues to outstrip supply, Morgan Stanley sees US businesses rushing to fill the breach with investment.
• The bank highlighted three underlying trends driving long-term capex: "near-shoring" supply chains closer to home, automation, and decarbonization.
• Analysts named Rockwell Automation and Eaton Corp, two industrial equipment companies, as strong buys.

As demand continues to outstrip supply, Morgan Stanley sees US businesses rushing to fill the breach with investment, boosting stocks in the construction and industrial sectors, analysts wrote in a note on Thursday.

Analysts described a "red hot capex cycle," driven by supply constraints and sky-high demand, with investment growth exceeding GDP through the end of 2022. Looking at four decades of data, capex running above GDP has tended to predict robust sales in sectors that build physical structures - like construction, engineering, and industrial conglomerates - they wrote.

But in those sectors, the association between strong capex and stock market performance is less straightforward, in part because cyclical increases in capex can be short-lived.

So to capitalize on booming investment, the bank pointed to three underlying trends that are likely to sustain capex in a more durable way: "near-shoring" supply chains closer to home, automation and digitization, and decarbonization.

Stocks that are in a position to gain from these long-term developments are the best bets for the capex surge. In particular, analysts named Rockwell Automation and Eaton Corp, two industrial equipment companies, as strong buys.

On Rockwell, which sells industrial automation tech, analysts argued that automation tends to far exceed industrial production growth during hot capex periods and that markets are underestimating the business. Eaton, a electrical equipment manufacturer, is set to benefit from a wave of electrical equipment installation as firms invest in capital.

Year-to-date, Rockwell and Eaton are up 17% and 28%, respectively.