The Industrials industry lost some momentum in the third quarter but retained most of its gains for the year. Share prices declined from summer highs across all sectors, although valuations remained relatively stable and M&A activity held steady.
Performance varied considerably by sector. Aerospace & Defense surrendered nearly all of its earlier gains amid election-year uncertainty over military spending, while freight-related businesses continued to outperform.
Looking ahead, demand for data centers and defense systems, along with conditions in the freight market, will be important to the industry's performance amid continued election and financing uncertainty.
Sector Performance
All five sectors declined during the quarter, but four remained well above year-ago levels. Aerospace & Defense was the exception. Its index reached its high for the year in August, then gave back most of that gain. It finished up just 2.1% year over year after a 9.8% decline in the quarter. The selloff reflected concerns extending across the sector.1 Investors weighed whether November's midterm elections could bring closer scrutiny of defense spending. Higher fuel costs also clouded the outlook for air travel.
After leading the industry for the previous two quarters, Specialty Contracting posted the largest quarterly decline, down 10.2%. It remains up 20.3% year over year. Associated Builders and Contractors (ABC), a construction trade group, reported that contractor backlog rose in August.2 Roughly one in six ABC members reported having a data center contract, the highest share on record.2 Backlogs continued to grow despite the decline in Specialty Contracting share prices.
Transportation & Logistics led the industry in year-over-year returns, up 24.4%, and eased only 3.3% in the quarter. The freight recovery noted last quarter continued. A truckload rate index from investment bank TD Cowen and AFS Logistics, a logistics and freight audit firm, stood 19.7% above its 2018 baseline in Q3.3 AFS attributed the climb to steady demand chasing a shrinking pool of trucks.3
Contract Manufacturing and Distribution also eased from summer highs but still hold gains for the year. The Institute for Supply Management (ISM) manufacturing index showed a ninth straight month of expansion in September.4
Valuations were more stable than share prices. EV/EBITDA multiples declined across all five sectors, although most changes were modest. Aerospace & Defense is the exception. Its multiple fell to 19.4x, the lowest point of the year and down from 23.5x a year ago.
Specialty Contracting's EV/EBITDA multiple declined to 14.5x, roughly in line with a year ago. Transportation & Logistics, meanwhile, saw its multiple increase from 7.5x to 9.8x over the same period.
Middle-Market M&A Perspective
The Dinan Industrials Index† declined 6.7% in the quarter, outperforming the S&P 500 Industrials Index, which fell 9.2%. Over the past five years, the Dinan Industrials Index has gained 73.9%, slightly ahead of the broader S&P 500's 71.7% return. Despite the quarterly pullback, the Dinan Industrials Index remains near its five-year high.
The Dinan Industrials Index EV/EBITDA multiple declined to 16.2x in the quarter but remained above its year-ago level of 15.3x. This placed it above three of the five industry sector multiples but below the S&P 500's 18.1x.
Despite weaker public-market performance, Industrials transaction activity held near last quarter's level. For middle-market business owners, steady deal volume suggests buyers remain active, even as valuations face pressure.
M&A Activity & Transaction Environment
Industrials recorded 405 transactions in Q3 2026, little changed from 413 in Q2 but below the 455 recorded a year earlier.
Notable transactions this quarter reflected continued acquisition activity across defense technology and industrial distribution. Government technology contractor Booz Allen Hamilton acquired Ultra Electronics Advanced Tactical Systems for $720 million.5 The business makes defense software, encryption and edge-computing products. Booz Allen said the deal accelerates its ability to scale its defense technology products.5
Ondas, a developer of drones and autonomous defense systems, acquired DZYNE Technologies, a maker of long-endurance drones and counter-drone systems.6 Ondas said the combination accelerates the build-out of its autonomous defense platform.6
In distribution, Ferguson, a distributor of plumbing and industrial products, acquired FloWorks, a Houston-based valve and flow control distributor, for $1.6 billion.7 Ferguson said the deal strengthens its position in high-growth industrial end markets. FloWorks serves customers in chemicals, power generation and data centers.7
Outlook & What to Watch
November's midterm elections may clarify the defense spending outlook that weighed on Aerospace & Defense. Since quarter end, investor concerns about AI infrastructure spending and financing have raised questions about the durability of data center investment, an important source of demand for Specialty Contracting.8 Freight capacity and fuel costs will be important factors in determining whether Transportation & Logistics can sustain its outperformance.
† The Dinan Industrials Index is a proprietary index of publicly traded middle-market Industrials companies maintained by Dinan Capital Advisors. Index composition is available upon request.
References
1 The Washington Post (via The Spokesman-Review). "Defense stock rout lures dip buyers looking past U.S. election." October 15, 2026. https://www.spokesman.com/stories/2026/oct/15/defense-stock-rout-lures-dip-buyers-looking-past-u/
2 Construction Dive. "Construction backlog rebounded in August as more firms won data centers." September 16, 2026. https://www.constructiondive.com/news/construction-backlog-august-2026-more-data-centers/830552/
3 Commercial Carrier Journal. "Fuel, capacity and peak fees push freight rates to record highs." October 14, 2026. https://www.ccjdigital.com/economic-trends/indicators/article/15837351/freight-rates-near-records-as-fuel-capacity-tighten
4 Logistics Management. "Manufacturing grows in September amid some broad economic concerns, reports ISM." October 1, 2026. https://www.logisticsmgmt.com/article/manufacturing_grows_in_september_amid_some_broad_economic_concerns_reports_ism
5 Booz Allen Hamilton. "Form 8-K and press release: acquisition of Ultra Electronics Advanced Tactical Systems." August 24, 2026. https://investors.boozallen.com/node/20781/html
6 The Defense Post. "Ondas Acquires DZYNE Technologies." July 7, 2026. https://thedefensepost.com/2026/07/07/ondas-acquires-dzyne-technologies/
7 Industrial Distribution. "Ferguson to Acquire FloWorks for $1.6B." July 13, 2026. https://www.inddist.com/mergers-acquisitions/news/22970480/ferguson-to-acquire-floworks-for-16b
8 Yahoo Finance. "Stock market today: Dow jumps, S&P 500, Nasdaq gain as AI jitters fade." October 15, 2026. https://finance.yahoo.com/markets/live/stock-market-today-dow-sp-500-rise-nasdaq-trims-losses-as-treasury-yields-sink-153611834.html
