Investing.com -- Industrial efficiency stocks broadly underperformed key benchmarks during the third quarter of 2026 as HVAC and machinery companies navigated higher interest rates, rising input costs, and weakness in the AI infrastructure trade. However, analysts at Oppenheimer see improved conditions ahead as the sector enters earnings season with lower expectations and reduced valuations.

The sector has experienced significant multiple contraction since the mid-June Federal Reserve meeting, with industrial efficiency stocks declining 19% on average compared to a 10.7% drop for the XLI industrial index and a 7.9% decline for the S&P 500.

Companies with greater exposure to data centers were generally more impacted by the selloff. With stocks reverting toward or below long-term forward multiples, Oppenheimer views the cautious sentiment as creating a better setup heading into the quarter.

The broker notes that relative to second quarter earnings season, there appears to be a somewhat lower bar for stocks. Sentiment now factors in execution and political risks to a greater degree, while demand trends across most key verticals remain supportive of upward estimate revisions.

Oppenheimer believes this setup could support a sector rally following earnings and midterm elections, though execution on elevated backlogs amid supply constraints and cost inflation is expected to drive performance dispersion during third quarter earnings.

Here are Oppenheimer’s top picks in the industrial efficiency sector:

1. Forgent Power Solutions - Following order acceleration in late 2025 and early 2026, Forgent Power Solutions shows the clearest potential for second-half 2026 data center revenue upside, according to Oppenheimer. Revenue growth trajectory analysis points to strong ramp execution as the sector focuses on substantial growth assumptions for the second half of 2026 and 2027 amid supply chain constraints.

2. Trane Technologies - Commercial HVAC pipeline commentary supports continued commercial orders growth in the third quarter of 2026 despite sequentially challenging comparisons. Within residential markets, quarter-to-date sell-in trends align with revised industry outlooks and exceed the company’s mid-single-digit growth expectations, Oppenheimer noted.

3. Caterpillar - The company’s data center ramp is viewed as more predictable, Oppenheimer said, with emphasis on synchronous growth across its portfolio.

4. Toro - Toro rounds out Oppenheimer’s top picks in the industrial efficiency sector.

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