Morgan Stanley's latest sector review identified multiple pockets of order acceleration within US manufacturing during the first quarter of 2026. The firm highlighted process machinery, industrial machinery, communication equipment, HVACR and power transmission as verticals showing clear positive momentum in Q1 when measured against the FY 2025 run-rate.
Order trends and timing
According to the analysis, several categories recorded a positive rate of change for Q1 2026 relative to the FY 2025 baseline. Industrial machinery orders in particular have displayed durability, with strength stretching to eight months. The report also points to an inflection in process machinery orders that occurred prior to the US-Iran conflict, which the analysts view as a potentially favorable signal for continued activity.
Segments showing caution
The firm called out aerospace and defense as verticals with negative rates of change. However, Morgan Stanley characterized order patterns in those sectors as lumpy, cautioning that they are not dependable near-term indicators of underlying momentum.
Earnings season focus - Q2 guidance
Analysts at Morgan Stanley said Q2 guidance should serve as the primary performance barometer this earnings season, with markets set up to reward companies that can demonstrate delivery amid macro uncertainty. The firm warned that looming cost inflation tied to commodities and tariffs is a headwind companies will face heading into Q2.
Expectations for Q1 updates
For Q1 company updates, Morgan Stanley expects generally positive order commentary. The firm singled out data-center exposure as displaying sustained strength following reported Q4 results, and it described US short-cycle businesses as building on favorable Q4 momentum. They anticipate positive updates from companies with data center exposure and expect several short-cycle firms to report a positive rate of change.
Geopolitical and demand concerns
The report raised concerns about consumer and international activity following the US-Iran conflict. Morgan Stanley expects activity in the Middle East to recover more slowly than managers indicated in March, presenting a risk to international-facing volumes.
Interpretation of short-cycle gains
Importantly, the firm interprets the inflection in US industrial machinery orders as constructive and tied to firms expanding US production capacity in response to tariffs. Morgan Stanley stated that the short-cycle momentum observed over the past six months appears to reflect a relocation of output rather than a shift in demand or consumption.
Overall, Morgan Stanley's read of Q1 order trends points to selective strength across manufacturing verticals, tempered by cost pressures and geopolitical uncertainty. The firm will be watching Q2 guidance and company-specific order updates closely as signals of whether those early-year trends can persist.