The construction sector is experiencing a whirlwind, given the various factors, favorable or unfavorable, affecting its different industries. On a favorable note, increased infrastructure spending, improved demand for energy transition and low-carbon projects, improved housing demand and operational efficiency efforts are likely to have offered solid grounds for top-line growth. On the other hand, a mortgage rate lingering between 6% and 7% (during the October-December 2024 period), seasonal impacts, ongoing inflationary pressures and rising costs (material, labor, land) are expected to have pressured the bottom line to a great extent.

Notably, some of the companies under the broader construction sector, including Watsco, Inc. (WSO Quick QuoteWSO - Free Report) , Fluor Corporation (FLR Quick QuoteFLR - Free Report) , Vulcan Materials Company (VMC Quick QuoteVMC - Free Report) , Toll Brothers, Inc. (TOL Quick QuoteTOL - Free Report) and Tri Pointe Homes, Inc. (TPH Quick QuoteTPH - Free Report) , are set to report their quarterly earnings tomorrow.

See the Zacks Earnings Calendar to stay ahead of market-making news.

Through a broader view of the Construction sector, as of Feb. 12, 85.7% of the companies out of the 345 S&P 500 members had released their earnings. Having the sector’s market capitalization of 84.6%, these companies, in total, reported a 3% decline in the bottom line with the top line inching up 0.1%. Of the companies that have reported, 75% beat on earnings while 66.7% topped the revenue estimates.

Expectations of the Construction Sector’s Earnings Season

Per the latest Earnings Trends report, construction sector earnings are expected to inch down 1% in the fourth quarter compared with the 1.8% decline reported in the third quarter of 2024. Revenues are anticipated to increase 1.6%, indicating a sequential slow growth rate from 2.3%.

Factors Driving the Broader Sector’s Growth

The United States is witnessing a boost from increased infrastructure spending through several federally supporting initiatives including the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). These governmental initiatives are proving incremental for companies engaging in public construction, engineering and low-carbon projects, resulting in a growing backlog. Furthermore, continued strength in environmental remediation, national security and nuclear fuel markets is adding to the uptrend.

Amid a lingering inflationary environment and increasing cost structure, the company-specific aspects of ensuring operational efficiencies through cost-cutting efforts and increased savings are also coming in handy. The impact of these strategic initiatives can be substantiated by the sequential contraction in the quarterly loss estimates.

Notably, homebuilders are navigating through a tough housing market through increased incentive actions and lower average selling prices (ASPs), along with several other company-specific homebuying aspects to foster new home orders and closings.

Challenges Posing a Threat to the Construction Sector

Although the homebuilding firms are engaging in various strategic efforts to foster housing demand, as mentioned above, the still-high mortgage rate (wavering between 6% and 7%) is restricting the desired growth trend. Even though homebuyers are getting accustomed to the new mortgage rate benchmark, affordability is still a concern in many regions of the country.

Moreover, the lingering inflationary pressures are unfavorably affecting the cost structure of the firms in the construction sector. The firms’ margins are being pressured due to increased labor expenses along with materials and land costs. Also, high operating expenses are taking a toll on the companies despite their continued efforts to ensure operational efficiencies and expand margins.

Also, to some extent, weather-related challenges and annual seasonality act as headwinds for companies engaging in distributing heating and air conditioning equipment along with construction activities.

Construction Stocks to Watch

Amid a basket of stocks, to identify one with the potential to beat earnings estimates, the following Zacks methodology can be exercised. The Zacks model suggests that a company needs to have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat. You can uncover the best stocks before they’re reported with our Earnings ESP Filter.

Here are five bundled stocks that are set to report their earnings on Feb. 18.

Watsco: This distributor of heating, ventilation and air conditioning equipment has an Earnings ESP of +0.94% and a Zacks Rank of 2. WSO reported lower-than-expected earnings in each of the trailing four quarters, with the negative average being 10%. You can see the complete list of today’s Zacks Rank #1 stocks here.

The Zacks Consensus Estimate for WSO’s fourth-quarter 2024 revenues and earnings per share (EPS) is pegged at $1.65 billion and $2.13, indicating growth of 3% and 3.4%, respectively, from the year-ago figures. (read more: Watsco Gears Up to Report Q4 Earnings: Things to Keep in Mind)

Fluor: This Texas-based EPCM provider has an Earnings ESP of -8.09% and a Zacks Rank #4 (Sell). FLR reported better-than-expected earnings in two of the trailing four quarters and missed on the remaining two occasions, the negative average surprise being 0.3%.

The Zacks Consensus Estimate for FLR’s fourth-quarter 2024 revenues and EPS is pegged at $4.72 billion and 78 cents, implying growth of 23.6% and 14.7%, respectively, from the year-ago figures. (read more: Fluor Gears Up to Report Q4 Earnings: Here's What's in Store)

Vulcan: This Alabama-based supplier of construction aggregates has an Earnings ESP of 0.00% and a Zacks Rank of 3. VMC reported better-than-expected earnings in two of the trailing four quarters and missed on the remaining two occasions, the average surprise being 0.7%.

The Zacks Consensus Estimate for VMC’s fourth-quarter 2024 revenues is pegged at $1.83 billion, indicating a decline of 0.4% year over year. The EPS estimate of $1.76 indicates 20.6% growth from the year-ago figure. (read more: Vulcan to Report Q4 Earnings: Here's What Investors Should Know)

Toll Brothers: This Pennsylvania-based homebuilding company has an Earnings ESP of 0.00% and a Zacks Rank of 4. TOL reported better-than-expected earnings in three of the trailing four quarters and missed on the remaining occasion, the average surprise being 6.6%.

The Zacks Consensus Estimate for TOL’s first-quarter fiscal 2025 revenues and EPS is pegged at $1.9 billion and $1.99, representing declines of 2.6% and 11.6%, respectively, from the year-ago figures. (read more: Toll Brothers Stock Before Q1 Earnings Release: To Buy or Not to Buy?)

Tri Pointe Homes: This California-based homebuilder has an Earnings ESP of 0.00% and a Zacks Rank of 3. TPH reported better-than-expected earnings in each of the trailing four quarters, with the average being 26.9%.

The Zacks Consensus Estimate for TPH’s fourth-quarter 2024 revenues and EPS is pegged at $1.2 billion and $1.26, representing declines of 3% and 7.4%, respectively, from the year-ago figures.