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Key Takeaways
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We are seeing the first signs of a cyclical improvement, felt most acutely by short cycle businesses
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Reduced uncertainty around tariffs, fiscal, and monetary policy is helping customers place orders with more confidence
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Improving industrial top lines should drive margins and cash flow in 2026 and beyond
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Quality companies have used the last three-year downturn to improve their business, emerging stronger than the market expects
The main message from earnings this season was that, after three years of downturn, the manufacturing economy is starting to improve—slowly, but meaningfully. The term of the day was “feels better”— the first positive sign in a long while.
The First Positive Cyclical Signal
Coinciding with a tick up in the purchasing managers’ index (PMI) above 50, which designates expansion, companies spent the Q1 reporting season describing improvement. This was particularly strong among so-called short cycle industries—products that reflect immediate customer demand rather than longer-term capital projects. These consumable industrial components are usually first to turn when the industrial market improves.
For almost nine quarters, Parker Hanafin’s general industrial segment, which accounts for almost half of the business, has seen flat or negative order growth. For the fourth quarter, results started to improve and for Q1 they signaled a “gradual recovery.”
The chart below compares Parker’s guidance changes in January 2025 vs. January 2026. It is notable how many more segments are improving or stable this year.
Lifting Uncertainty Drives Customers to Order
Over the last three years the industrial economy has contended with multiple headwinds. Interest rates have risen from record-low levels. Tariffs and geopolitical uncertainty have created a difficult environment for customers. This has led customers to de-stock inventories that were bloated post the COVID supply shocks. Q1 earnings season highlighted how stability in the second half of 2025, falling rates, a new tax law, and reduced tariff uncertainty have led to improving sentiment.
Ingersoll Rand makes pumps and compressors used across the factory floor and in various industries. Their CEO commented specifically on the reduction in uncertainty and its impact on order momentum.
“On the general industrial side, we have seen more stability, especially in the back half of 2025 as we kind of have passed the peak of uncertainty related to tariffs. And that being said, we're cautiously optimistic about the improving trends moving into 2026 … as you saw from the order rates as we kind of deliver here in the fourth quarter. And we see somewhat of the momentum continuing here as we enter 2026 and into January. So the order momentum, I'd say, continues.”
—Ingersoll-Rand, CEO Earnings Call, February 13, 2026
Improving Top Lines Drive Strong Earnings and Cash Flow
Cognex is one of the world’s leading makers of machine vision—used, among other things, to check for product defects. Product returns are a costly component of any business; reducing them can create meaningful gains. Companies that make equipment used to increase factory efficiency and factory productivity are core to the reshoring theme, as the US does not have enough skilled labor to support re-industrialization.
Cognex Q4 results showed a slight acceleration in revenue growth (from low-mid single digits to mid-high single digits) . This topline upgrade, however, corresponded with a nice improvement in margins. Management raised its “through-cycle margin target” accordingly.
Cognex has not experienced both top-line growth and margin growth since 2021, in part because their top line has suffered from de-stocking. Cash-flow conversion was 130% which shows the leverage this company attains when sales inflect.
Companies Have Not Squandered the Downturn
Gates Industrial makes belts, chains, and specialty rubber hoses used in factories and transportation. Though it may seem boring, this is a high-market-share, high-margin business focused on service and aftermarket. Gates is conservatively managed and non-promotional, so their commentary carries weight:
“We've actually seen probably the most positive order trend exiting 2025 in maybe two or three years…and so this was the first time that we have seen in a while that we have seen a reasonably nice recovery or very strong recovery in order trends in the industrial OE.”
- Gates Industrial CEO, Earnings Call, February 12, 2026
More importantly, during the past three years, Gates’ management has not been standing still. It has reduced product complexity, optimized production facilities, and addressed the cost base. This is what quality companies do during downturns.
“In essence, we are exiting the down cycle with a structurally improved business... .”
- Gates Industrial CEO, Earnings Call, February 12, 2026
Why It Matters For Investors
After a three-year industrial downturn, even modest demand inflections can translate into outsized margin and cash-flow improvement, especially for high-quality, short-cycle businesses. If uncertainty continues to fade and order momentum broadens, investors may see a more durable earnings reset in 2026 than current sentiment implies. The key is owning companies with operating leverage, strong aftermarket/service mix, and management teams that used the downturn to structurally improve profitability.
How to Benefit From This Improving Environment
For investors seeking exposure to the core industrial economy, the Tema American Reshoring ETF (RSHO) invests in companies positioned to benefit from a potential resurgence in US manufacturing and improving industrial activity. As upturns build, this can be a very powerful opportunity—one which Tema has positioned for over the last 6-12 months by tilting into companies like Parker Hanafin, Gates Industrial, Cognex and Ingersoll Rand.*
For more of our research and recent insights on US reshoring and more, view and subscribe to our insights.
*Portfolio holdings are subject to change. For a full, up to date list of holdings, visit the RSHO fund page.
