Late-cycle dynamics in water stocks set to reward cash generative solutions

Despite intermittent volatility around trade and geopolitics, global equities delivered a third consecutive year of double-digit gains in 2025. After such strong returns, the dominant question now facing investors is whether the long-running bull market is nearing exhaustion or simply entering a more mature phase. The evidence points firmly to the latter.

While the pace of returns is likely to cool, the foundations supporting global equities remain broadly intact. Economic growth continues at a steady, if unspectacular, rate. Inflation is easing across major economies, monetary policy is becoming less restrictive, and corporate earnings remain resilient. This is not an environment of exuberance, but one of durability.

As the cycle matures, returns are increasingly driven by fundamentals rather than valuation expansion, favouring companies with visible cashflows, pricing power, and exposure to long-term structural trends.

This is leading to a shift in market leadership. After a prolonged period of concentration in a narrow set of US technology stocks, performance is broadening across regions, sectors, and styles. Value-oriented segments, non-tech industries, and international markets – particularly Europe and parts of the emerging world – are beginning to reassert themselves. This rotation reflects a late-cycle dynamic rather than a loss of confidence, underscoring the renewed importance of diversification.

As valuation discipline returns to the fore, areas that have lagged headline indices, yet retain strong structural fundamentals, are increasingly attractive. In parts of the environmental solutions universe, valuations remain below historical averages, creating scope for convergence as earnings visibility improves.

Operational efficiency to propel water stocks

This is particularly evident in water-related equities, as companies transition from a period of post-pandemic recovery and stabilisation to one defined by execution and secular growth. Pricing power remains a supportive feature across the value chain, although the exceptional price realisation of recent years is normalising toward historical averages. Looking ahead, margin expansion is expected to be driven less by pricing and more by operational efficiency and a shift toward higher-margin solutions.

For regulated utilities, the focus has decisively shifted from planning to delivery. In the UK, companies are entering the execution phase of the AMP8 investment cycle, providing tangible revenue visibility for suppliers and contractors. In the US, as well as in emerging markets such as Brazil, utilities are advancing record capital expenditure programmes, supported by a more predictable regulatory environment and a stable cost of capital. This synchronised infrastructure investment provides a defensive backbone to earnings at a time when broader economic growth may slow.

Among equipment manufacturers and technology providers, the narrative has moved beyond the end of destocking and toward the adoption of smart infrastructure. At the same time, industrial water demand is showing clear pockets of strength, driven by the rapid expansion of data centres and semiconductor manufacturing. These capital-intensive industries are structurally water-dependent, reinforcing long-term demand.

The picture for distributors and construction-exposed players is more mixed but remains resilient. Residential construction in China and parts of Europe continues to face headwinds, while the US housing market is showing early signs of stabilisation. More importantly, non-residential exposure tied to infrastructure and large-scale manufacturing projects is supporting order books. Consolidation remains an important growth lever, particularly for companies able to scale efficiently through acquisitions.

Waste fundamentals intact despite some challenges

The waste sector has a different set of challenges. After a strong start last year, US integrated waste stocks underperformed as markets rotated toward higher-risk assets. Pricing remained firm, but commodity price weakness and softness in cyclical volumes weighed on sentiment. Looking ahead, pricing is expected to moderate albeit remain high as inflation continues to ease, following two years of aggressive increases. Even so, companies are well positioned to preserve margins, with the price-cost spread still supportive.

Waste volumes are expected to stabilise gradually over the coming quarters. While a sharp rebound is unlikely, declines are expected to be less pronounced than last year. Construction and demolition (C&D) volumes are likely to improve modestly, supported by persistent housing shortages that continue to favour new construction. This should translate into incremental opportunities for C&D and special waste services.

One of the headwinds that remains is recycled commodity prices, particularly for old corrugated cardboard, which accounts for a significant share of the sector’s commodity exposure. Prices remain below long-term averages and are unlikely to recover sustainably until consumer demand and industrial activity strengthen.

Importantly, commodity‑linked revenue represents only around 5-10% of total revenue for the large integrated waste companies, limiting the overall earnings impact. Sustainability projects, including renewable natural gas, face a more finely balanced outlook as policy support and credit valuations adjust.

Notably, the hazardous waste sector continues to attract heightened attention from major industry players, demonstrating resilience amid strong demand and elevated pricing. Despite ongoing headwinds in industrial production, hazardous waste utilisation rates are expected to remain elevated throughout the year.

The anticipated uptick in broader economic activity, particularly if manufacturing reshoring accelerates, should sustain robust demand for hazardous waste management services and create new growth avenues within the sector.

In the broader context, fundamentals across water and waste remain compelling. Strong cash conversion, disciplined balance-sheet management, and clear earnings visibility defined the past year. As markets rotate and the cycle matures, these characteristics are likely to be rewarded. The bull market may be evolving, but with diversification, execution, and real assets back in focus, it still has room to run.