HVAC Sector Momentum: Earnings Outperformance and Long-Term Valuation Implications

The HVAC sector has emerged as a compelling case study in earnings resilience and valuation dynamics, driven by a confluence of macroeconomic tailwinds and industry-specific innovations. As of Q3 2025, the sector's performance has been marked by stark contrasts: while manufacturing segments grapple with tariff uncertainties, residential and industrial HVAC services have surged, fueled by refrigerant transitions, SEER upgrades, and climate-driven demand, according to the HVAC Systems Industry Research Report 2025–2033. This divergence raises critical questions about the sustainability of current valuations and their alignment with long-term growth trajectories.

Earnings Outperformance: A Tale of Two Segments

Comfort Systems USA, a bellwether in the HVAC services space, exemplifies the sector's earnings strength. In Q3 2025, the company reported a 63% year-over-year revenue increase to $2.45 billion and a net income of $291.6 million, or $8.25 per diluted share, according to Comfort Systems USA's Q3 2025 results. Its operating cash flow of $553.3 million and a $9.38 billion backlog underscore robust operational momentum. These results reflect broader trends in the residential and replacement markets, where demand for energy-efficient systems and refrigerant compliance has outpaced supply chain constraints, as detailed in the HVAC Sector Quarterly Update.

Conversely, the manufacturing segment remains mired in uncertainty. Tariff-related hesitancy has stifled M&A activity, with business owners prioritizing operational stability over aggressive expansion, a theme highlighted in CFRA: High Valuation Signal. However, pent-up demand is expected to materialize in 2026 as trade policy clarity emerges, potentially unlocking a wave of consolidation, a scenario PitchBook raised in its PitchBook Q2 2025 note.

Valuation Metrics: Overvaluation Concerns Amid Structural Growth

Despite the sector's earnings momentum, equity analysts caution against complacency. As of Q1 2025, private HVAC companies trade at an average of 8x EBITDA and 5.1x SDE, a 20% premium to pre-pandemic levels, according to the HVAC EBITDA & Valuation Multiples report. Public companies, however, face steeper scrutiny. CFRA's Emily Nasseff Mitsch notes that HVAC firms' P/E multiples are 32–39% above their three-year averages, signaling potential overvaluation, as discussed in The PE Playbook: HVAC 2025. This disconnect between private and public valuations suggests a market correction may be imminent, particularly as interest rate hikes constrain capital availability for larger deals.

The industrial HVAC segment, meanwhile, offers a more optimistic outlook. With a projected CAGR of 7.9% through 2030, driven by data center expansion and manufacturing modernization, this subsector is poised to outperform residential and commercial peers. Strategic acquisitions, such as Midea's $2.1 billion purchase of ARBONIA Climate in February 2025, underscore the sector's consolidation potential.

Long-Term Outlook: Climate-Driven Demand and Valuation Resilience

The global HVAC market is forecasted to grow at a 6.87% CAGR through 2033, reaching $442.68 billion. This growth is underpinned by urbanization, AI/IoT integration, and regulatory shifts toward energy efficiency. For investors, the key question is whether current valuations can withstand near-term headwinds.

Analysts like PitchBook's Q2 2025 report suggest a bifurcated path: while 2025 may see valuation compression due to macroeconomic pressures, the sector's structural demand-driven by climate change and infrastructure needs-will sustain long-term appreciation. Residential HVAC firms, with their stable customer bases, are particularly well-positioned to weather volatility.

Conclusion: Balancing Caution and Opportunity

The HVAC sector's earnings outperformance in 2025 highlights its dual nature: a resilient services segment and a cautious manufacturing landscape. While overvaluation risks in public companies warrant caution, the sector's long-term fundamentals-anchored in climate resilience, technological innovation, and industrial demand-remain robust. Investors should prioritize firms with strong operational margins, geographic diversification, and exposure to high-growth subsegments like industrial HVAC. As the sector navigates 2026's policy clarity and rate normalization, the key will be distinguishing between cyclical corrections and enduring value creation.