Investing.com — UK Capital Goods reporting season has been mixed but broadly in line with expectations, though the conflict in the Middle East is creating significant uncertainty for 2026 and 2027 outlooks.
The median stock delivered revenues in line with consensus, with median organic growth of 3% and average organic growth of 2%. Average underlying operating margins came in line with consensus but decreased by approximately 40 basis points year-over-year, driven predominantly by companies experiencing weaker volumes.
Share price reactions were significant during reporting season, with six companies out of 11 seeing moves of 5% or more on results day. Average 2026 and 2027 adjusted earnings per share revisions have been negative, falling 2% and 1% year-to-date respectively, driven by a generally more cautious tone from management teams given geopolitical and macroeconomic uncertainty.
The average stock in J.P. Morgan’s coverage is down 1% year-to-date after a strong rally ahead of results season. Only three stocks are up year-to-date: Halma, IMI and Oxford Instruments. The worst performers have been Genuit and Bodycote.
The Middle East accounts for approximately 4% of J.P. Morgan’s UK coverage revenue. While the evolving conflict creates significant uncertainty, the firm does not envisage a widespread freeze to Power Generation, Grid Infrastructure or Data Center capital expenditure projects, nor a significant deterioration in most other end markets which are at or around troughs after a protracted downturn.
However, end market recoveries in certain areas could be pushed back as inflation and rate increases weigh on the global economy, namely in consumer exposed markets, general industrial and residential construction.
J.P. Morgan’s European Economics team expects two interest rate hikes, with Brent prices averaging $100 per barrel in Q2, $90 in Q3 and $80 in Q4 before declining further in 2027. The team expects headline inflation to average 2.9% year-over-year in H2 2026.
For companies with Middle East oil and gas exposure, including Bodycote, IMI, Rotork, Smiths Group and Spirax, J.P. Morgan expects a negative impact in H1 given likely disruption in the region. However, the firm sees upside to medium term growth as investment in energy increases driven by energy security concerns.
Energy costs are relatively contained across the sector, representing approximately 1.5% of revenue on average, with Bodycote the exception at approximately 10%. Most companies have demonstrated ability to offset cost pressures through pricing power.
J.P. Morgan’s top picks pending developments over coming weeks are IMI PLC (LON:), Oxford Instruments PLC (LON:), Weir Group PLC (LON:) and Smiths Group PLC (LON:).
The firm’s trough EV/sales analysis suggests limited support in a downturn scenario with an average downside of 19%, with Genuit Group PLC (LON:) having the most valuation support.