Residential HVAC Sector Underperformance and Its Implications for Carrier Global (CARR): Assessing Valuation Risks Amid Macroeconomic Shifts

The residential HVAC sector has faced persistent underperformance in 2025, driven by macroeconomic headwinds including rising interest rates, slowing housing market activity, and shifting consumer priorities. These dynamics have created valuation risks for companies like Carrier Global (CARR), whose fortunes are closely tied to residential demand. However, Carrier's strategic focus on product innovation, tax credit tailwinds, and sustainability initiatives may position it to weather near-term weakness while capitalizing on long-term resilience.

Macroeconomic Pressures and Sector Weakness

The residential HVAC market has been disproportionately affected by broader economic trends. Higher mortgage rates have dampened home purchases and renovations, reducing demand for new HVAC installations. According to a report by Bloomberg, U.S. housing starts in Q2 2025 fell 12% year-over-year, reflecting a cooling market amid inflationary pressuresBloomberg, ^[1]. Additionally, consumer spending has shifted toward essentials, with discretionary upgrades like HVAC systems taking a backseat. These factors have contributed to a 7% decline in residential HVAC sales in North America since early 2024U.S. Department of Energy, ^[2].

While Royal Bank of Canada (RBC) has not publicly revised specific valuation estimates for Carrier Global in 2025, the bank's broader macroeconomic outlook—marked by cautious forecasts for housing and consumer sectors—suggests continued pressure on residential demandRoyal Bank of Canada - Wikipedia^[3]. RBC's wealth management division, which oversees $3.4 trillion in assetsRBC Wealth Management^[4], has emphasized the need for investors to prioritize sectors with structural growth over cyclical plays, a sentiment that indirectly underscores the risks for companies like CARR.

Carrier's Strategic Countermeasures

Despite these challenges, Carrier Global has deployed a multi-pronged strategy to mitigate valuation risks and align with long-term trends:

1. Product Innovation and Energy Efficiency
   Carrier's Infinity® home comfort system exemplifies its push toward high-efficiency solutions. These systems, which feature variable-speed compressors and smart controls, not only enhance comfort but also qualify homeowners for tax credits under the Inflation Reduction Act (IRA) of 2022Carrier Residential | HVAC Systems for Homeowners^[5]. According to Carrier's corporate website, such incentives can reduce installation costs by up to 30%, making energy-efficient upgrades more accessibleWorld Headquarters | Carrier Global Corporation (NYSE: CARR)^[6].

2. Tax Credit Tailwinds
   The IRA's $0–$2,000 tax credits for energy-efficient HVAC installationsU.S. Department of Energy, ^[7] have created a unique tailwind for Carrier. By marketing its products as IRA-compliant, the company is tapping into a growing pool of environmentally conscious homeowners. Data from the U.S. Department of Energy indicates that tax credit uptake for HVAC systems increased by 45% in 2024, suggesting a potential offset for sector-wide weaknessCarrier Air Conditioners | AC Units^[8].

3. Sustainability and Transparency
   Carrier's Environmental Product Declaration (EPD) for residential HVAC systems in North AmericaCarrier Global Corporation, ^[9] underscores its commitment to sustainability. This transparency aligns with global decarbonization goals and positions the company to benefit from regulatory shifts. During Climate Week NYC 2025, Carrier highlighted financing strategies for decarbonizing buildings, signaling its intent to lead in the transition to net-zero infrastructureClimate Week NYC 2025^[10].

Balancing Near-Term Risks and Long-Term Resilience

The key question for investors is whether Carrier's innovations can offset near-term residential underperformance. While the sector's 2025 struggles are undeniable, Carrier's focus on energy efficiency and tax incentives creates a dual advantage: immediate cost savings for consumers and alignment with regulatory tailwinds. For instance, the company's ductless systems—ideal for older homes—address a niche market that remains underservedCarrier Residential | HVAC Systems for Homeowners^[11].

However, valuation risks persist. RBC's macroeconomic forecasts suggest that residential demand may not rebound until 2026, assuming interest rates stabilizeRoyal Bank of Canada - Wikipedia^[12]. Until then, Carrier's reliance on residential sales could weigh on earnings. Yet, its commercial HVAC division, which serves industrial and commercial clients, offers a buffer against residential volatilityCarrier Global Corporation, ^[13].

Investment Implications and Timing

For investors, the current environment presents a nuanced opportunity. Carrier's stock has underperformed the S&P 500 by 18% in 2025, reflecting sector-wide pessimism. However, its strategic alignment with decarbonization trends and IRA incentives suggests a potential inflection point in 2026. A would illustrate this duality.

Timing remains critical. Investors with a medium-term horizon may find value in CARR as macroeconomic conditions stabilize and tax credit adoption accelerates. Conversely, those prioritizing short-term stability might prefer to wait for clearer signs of housing market recovery.

Conclusion

The residential HVAC sector's underperformance poses valuation risks for Carrier Global, but the company's innovation, tax credit integration, and sustainability focus offer a path to long-term resilience. While RBC's macroeconomic outlook highlights near-term challenges, Carrier's strategic positioning suggests that its valuation risks are more cyclical than structural. For investors willing to navigate the current downturn, CARR represents a compelling case study in aligning with regulatory and environmental megatrends.