According to a UBS research note, data center developers are continuing to expand capacity despite persistent supply chain constraints, and demand for artificial intelligence infrastructure is expected to accelerate by 2027, creating opportunities for industrial equipment manufacturers and engineering firms.
UBS analyst Steven Fisher said in an October 16 research report that industry experts attending the Data Center World Expo in Singapore reported that orders are accelerating, multi-year capacity bookings are continuously increasing, and there is strong confidence that AI infrastructure investment will extend beyond 2027.
These findings indicate that even as the broader economy faces inflationary pressures, data center spending remains a key growth engine for industrial companies.
Power Generation and Construction Companies Set to Benefit
UBS identified Caterpillar (CAT.US), Cummins (CMI.US) and Quanta Services (PWR.US) as beneficiaries of the ongoing data center construction push. Caterpillar and Cummins are positioned to capture demand for power generation equipment, while Quanta Services will benefit from grid investment.
Caterpillar told the UBS team that demand for power generation equipment remains exceptionally strong and that the company is expanding production capacity.
The report also highlighted growing market interest in behind-the-meter power generation, a model that allows data centers to generate power on-site rather than relying entirely on the public utility grid. UBS expects that through 2028 or 2029, most projects will still primarily use grid-connected configurations with traditional diesel backup systems. The eventual combination of on-site generation, energy storage and grid connection will determine how much revenue equipment manufacturers can capture.
Supply Shortages Remain a Constraint
Industry experts cited equipment availability and manufacturing capacity as the primary obstacles to data center expansion. Suppliers of cooling systems, power equipment and power generation technology are racing to shorten delivery times and increase output. Customers are increasingly favoring prefabricated and modular systems to speed up construction and reduce labor requirements.
The industry is also transitioning toward 800-volt direct current power distribution, which is expected to be deployed between 2027 and 2029. UBS said the technology should reduce copper demand, heat generation and the complexity of power distribution systems.
Construction Share Continues to Rise
UBS estimates that data centers directly account for approximately $63 billion, or about 5%, of the $1.3 trillion U.S. non-residential construction market. However, when indirect spending on manufacturing facilities, power infrastructure and related projects is included, the bank estimates that data centers drive 20% to 30% of overall non-residential construction activity and the majority of its growth.
The strength of this spending contrasts with market concerns about the broader industrial economy. UBS noted that inflation and rising interest rates related to the Iran conflict have complicated expectations for an industrial recovery. The bank expects higher input costs to become more evident in fourth-quarter results, particularly for companies with significant exposure to fuel and materials.
Caterpillar Power Business Margins in Focus
Caterpillar (CAT.US) reported better-than-expected second-quarter profit in its power and energy segment, with incremental margins reaching 39%. UBS said consensus expects incremental margins to remain elevated in the third and fourth quarters but to decline from second-quarter levels. Caterpillar has warned that the exceptionally favorable incremental profitability in the second quarter may not persist.
Investors are also questioning whether industrial stocks can continue to outperform the broader market if AI-related order growth slows. Fisher believes that even if the absolute level of backlog remains high, a substantial slowdown or flattening in Caterpillar's sequential backlog growth could make further outperformance more difficult.
AI Investment Risks
UBS acknowledged that the AI infrastructure boom could eventually slow as technological advances reduce computing costs and smaller AI models gain broader adoption. Such developments could pressure the profitability of AI companies and reduce demand for new data centers. Nevertheless, the bank still expects technology adoption to create more opportunities for industrial suppliers, while warning investors to monitor the sustainability of infrastructure spending.
The report also raised questions about the financial stability of newer cloud computing providers, following a sell-off in CoreWeave (CRWV.US) bonds. UBS said that compared with established hyperscale cloud operators, industrial suppliers typically disclose insufficient information to determine their exposure to these customers. This distinction may become increasingly important as investors assess the durability of equipment backlogs and future orders.
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