Macro & Market Views
Beyond the Build
Beyond the Build
Following infrastructure investment into the broader physical economy.
For the past several years, data centers have been one of the clearest manifestations of a broader shift taking place in the economy. Artificial intelligence (AI) may live in the cloud, but the infrastructure required to support it is decidedly physical. Data centers need enormous amounts of power. Power requires generation, transmission and distribution. Facilities need concrete and steel, cooling and water, coatings and electrical equipment. Somewhere along the way, the digital economy became a very tangible one.
This fact has become much more widely appreciated when it comes to data centers. But we think the next chapter may be even more interesting as infrastructure investment broadens well beyond them, particularly for the small businesses that meet the needs of this buildout.
Manufacturing is returning closer to home. The electrical grid requires significant modernization. Roads, bridges and water systems need investment. New semiconductor, pharmaceutical and energy facilities are moving from announcements toward construction. These are different end markets with different drivers, but they share an important characteristic: they require an enormous amount of physical infrastructure.
We think we are beginning to see a handoff—not away from data centers, but toward a broader set of demand drivers. Data centers have provided an important source of demand for many industrial businesses while other end markets remained relatively subdued. Now, broader infrastructure and reshoring investment appears to be moving from plans on paper toward dollars in the ground. Data centers remain part of that story, but increasingly they are one of several sources of demand. That distinction matters because it could make the fundamentals more durable than investors appreciate.
We have seen this evolution firsthand with Insteel Industries, the nation’s largest manufacturer of steel wire reinforcing products used in concrete construction. Data centers have recently helped support demand, but Insteel’s products are also used in bridges, highways and municipal water systems. Its Engineered Structural Mesh substitutes for traditional rebar while reducing the labor required to reinforce concrete—an increasingly valuable attribute in a construction industry struggling with skilled labor availability. The company is deliberately targeting applications where speed of construction matters most, including data centers, reshoring mega-projects and other mission-critical infrastructure.
AZZ, Inc. offers a different window into the same phenomenon. It galvanizes and coats the steel that ultimately becomes things like transmission structures, bridges, light poles and other critical infrastructure. It is not a particularly glamorous business, but we like that.
What is interesting today is the breadth of demand reaching its facilities. Infrastructure investment, manufacturing reshoring, power generation, transmission and distribution, renewables and data centers are all contributing to activity. What matters to us is the convergence of these end markets because several independent forces increasingly require many of the same physical things.
More power requires transmission. More manufacturing requires factories. More factories require water, electrical systems and environmental controls. More construction requires concrete, steel and skilled labor—or technologies that allow builders to accomplish more with less of it.
CECO Environmental takes that idea one layer deeper. The company provides highly engineered equipment used to help industrial facilities manage air, water, energy and other critical processes. Its backlog grew 72% year over year in the first quarter of 2026, with power representing roughly one-fifth of the total. But the more interesting observation from our conversations with management was the breadth of what they are seeing: pharmaceuticals, oil and gas, manufacturing reshoring and other industrial projects alongside data centers. The company is also expanding in industrial water, a significant long-term opportunity as more manufacturing capacity gets built.
There is another characteristic of infrastructure investment that we think is easy to underestimate: time. A project announced today does not create demand for every supplier tomorrow. Land must be prepared, foundations poured, buildings erected and equipment installed. Different businesses participate at different stages. As more projects progress simultaneously, demand can layer on itself over a period of years rather than arrive all at once.
That does not mean the path will be linear. Industrial businesses are cyclical. Projects get delayed, input costs fluctuate and quarterly results can be messy. Greater industrial exposure requires accepting some additional volatility. But we recognize that volatility and permanent impairment are not the same thing.
We are willing to tolerate the former when we believe a business has the capacity to suffer, a durable competitive advantage and a balance sheet that allows management to define its own playbook. Insteel operates with no debt and a flexible cost structure. AZZ benefits from a hard-to-replicate network and a tolling model that limits exposure to metal-price volatility. These characteristics matter because durable demand does not eliminate cycles; we believe it gives well-positioned businesses more opportunities to create value through them.
We are not making a macro bet on an infrastructure supercycle. Instead, we continue to focus on underwriting individual businesses. But much like the durable demand we have discussed before, we pay attention when several independent forces begin pointing in the same direction. The path will inevitably be uneven, but in our view the need to invest in the physical economy is becoming increasingly difficult to dispute.
Data centers remain an important part of the build. Increasingly, however, they are only one part. We believe the next chapter is the proliferation of infrastructure itself—and the opportunity to own small businesses with durable roles in providing the materials, equipment and expertise required to build it.
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As of August 31, 2026, Diamond Hill owned shares of Insteel Industries, AZZ, Inc. and CECO Environmental.
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