The negative performance trend started in Q411, following the euro and sovereign crisis. At the time, results revealed already hesitant end-markets for early-cycle industries in sectors such as trucking (AB Volvo, 'BBB+'/Stable) and steel (ThyssenKrupp AG 'BBB-'/Negative). This trend continued in H112 and profitability in early-cycle segments such as electrical (ABB) dropped materially year-on-year.

Fitch expects margin squeezes to persist, due to ongoing price competition in combination with higher research and development (R&D) and selling and marketing (S&M) costs, which will more than offset the relief from lower commodity prices. The agency forecasts an average decline in metals input prices in the mid- single digits.

Fitch's moderate outlook for the capital goods sector is supported by declining leading indicators for the industry, such as the widely followed global Manufacturing Purchasing Managers' Index (PMI), which dropped to its lowest point in five months in May just above the expansion mark of 50, but well below its average 2011 level. The US, which has been a positive surprise to the industry this year, is starting to show signs of a slow-down. Conditions continue to deteriorate in China and Europe remains a drag on the global industry.