Eastern railroad volumes finished 2025 weaker than expected, and we have lowered 4Q25 estimates. We remain below consensus on Union Pacific, and lower 2026 EPS estimates below consensus for all U.S. rails, given tepid growth expectations. Our recentl railroad roundtable pointed to weak demand trends in 2026. The UP-NS STB merger application will remain the focus for investors, particularly with CGP (Committed Gateway Pricing). We remain cautious on the near-term industry outlook. Our 4Q25 Rail Shipper Survey indicate that pricing and growth expectations recovered off troughs but are still at low levels as demand expectations are soft to start the year. M&A remains the focal point for the rail group during 4Q earnings, and shares should continue to trade on the STB review outlook and truck-conversion narrative. Our rail panel unanimously sees the merger application passing despite concerns and desire for more operational details.
Where We Stand
U.S. carriers saw carloadings decline 3.5% in 4Q25, led by Forest Products (–8.5%). We lower 4Q25 estimates for both Eastern carriers, cutting carloadings expectations as a seasonal slowdown was evident. We lower our 2026 estimates below consensus expectations, primarily driven by our lowered volume assumptions.
CSX had the best volume performance in the quarter (roughly flat), helped by merchandise. 4Q25 EBIT was negatively impacted by $40MM from a coal derailment and auto supply chain impacts; most of this should be a one-time cost and some volumes are expected to be recovered in ’26. Howard Street Tunnel is on track for completion by end of 1Q26, unlocking new lanes, and CSX is positioned to win back some business it had previously lost. CSX is relatively bullish on ’26 volumes after having to deal with a lot of closures last year that should be in the rearview mirror. Recent headlines of workforce reductions suggest CEO Steve Angel is looking to drive cost/ productivity initiatives into ‘26.
NSC saw carloads decline 4.5% in4Q25, an impact from softening international demand (intermodal –8%), and ag products declining 9%. Mix should be ~neutral for the company in 4Q25. NSC’s quarter is the least important in our view given the stock is trading on deal probability; we expect management to be transparent about the 2026 outlook given their 3Q25 commentary about a deteriorating industrial pipeline.
UNP volumes are holding up marginally better than we had modeled (recall we were the low on the Street given Consensus was not capturing the difficult December comps). UNP expects earnings to decline in 4Q25 (in line with our previous estimates) and called out a $30-$40MM charge on merger-related expenses that will likely be GAAPed out. UNP’s call will likely focus on its application to the STB, particularly surrounding CGP.
We recently hosted a railroad roundtable. Our panelists unanimously expect weak core demand trends in 2026. Tariff clarity will be necessary for underlying volume trends. Chemical and building materials shippers on the call attested to a weak demand environment. The intermodal outlook was subdued as well. On a positive note, all panelists said rail service is expected to hold up well.
UNP/NSC Merger
The STB filing will likely be the topic du jour during rail earnings. We hosted a call with a former Class I CEO to review the recent merger application. He believes UNP/NSC have put forward a very strong application that is likely to be accepted, though the final word is likely in 2027. Review could likely take longer than planned, and a 1Q27 timeframe for a final decision is reasonable with little possibility that the process can be expedited. CGP effectively does the job of enhancing competition by offering shippers more choices. Traditional gateway pricing has been limited to some lanes in the I-5 corridor and allows a captive shipper to gain access to a competing railroad at pre-determined prices. We believe, and as discussed on railroad panel, that more details may be expected by the STB as it related to CGP. This catch-all approach by UNP has had very little uptake from shippers generally.
Intermodal Outlook
JBHT saw a peak season that met expectations in 4Q25, with no major surprises. Despite market weakness, JBHT has idiosyncratic operational initiatives that should drive the stock in 2026, with $100MM targeted, 80% of which was achieved by 3Q25. We believe there will be more wood to chop in 2026, largely within their intermodal business. We continue to see HUBG as the best positioned to capture growth from a UNP/NSC merger.
Panelists on our railroad outlook call offered subdued outlook for 2026. International intermodal will likely continue to rationalize into 1Q (pull forward ahead of tariffs last year) and trade deficit data pointing to a declining number of U.S. goods imports. Domestic intermodal hinges on the truckload market inflection that is gaining steam but has not impacted contract rates to date and is unlikely to materially impact bid season this year (we hosted a truck panel that pointed to LSD rate increase expectations in 2026, with more carriers already looking toward 2027 as the rapid-growth year). We lower 2026 estimates for both JBHT and HUBG below consensus given our view of more tepid growth expectations. Another year of anemic contract rates on the TL side should limit pricing upside for intermodal carriers come Spring.
Valuation
Both Eastern carriers are trading above their forward average, while UNP trails marginally. We continue to view NSC and UNP a special situation that will trade in line with deal probability and synergy targets. We broadly lower 2026 EPS forecasts for all U.S. rails given our view of tepid growth expectations, while rolling out 2027 estimates.
4Q25 Rail Shipper Survey
The survey results were modestly positive for the U.S. rail players, but M&A remains the focal point for the U.S. rail group during 4Q25 earnings, and shares should continue to trade on STB review outlook and the truck-conversion/merger competition narrative. Pricing and growth expectations ticked up 30bps each off troughs, but absolute levels are still quite low and track with relatively subdued sentiment expressed on our recently hosted railroad roundtable.
Pricing Ticks Up, Still Below Averages
Rate hike expectations for the next 6-12 months came in at 3.3%, up 20bps vs. our 3Q25 survey but still below the survey’s five-year average of 3.7%. Participants on our recent railroad roundtable maintained that tightening transport capacity has been evident but not large enough to gain confidence in a stronger rail pricing cycle just yet. Trough truckload rates had seen the trucking premium dwindle through the freight recession, but the 4Q25 surge in spot rates produced some normalization. The share of participants answering that truck is a cheaper mode than rail dropped sharply for both carload and intermodal shippers (down 7 and 4 points, respectively).
Macro Outlook Improves Albeit Marginally
Shipper estimates of business growth increased to 1.5%, a 30bps sequential increase but still close to trough levels. The results line up with commentary from our railroad panel, which suggested a sluggish 2026 demand environment. Economic confidence fared better with the share of those more confident up 10 points but off very low levels. Given relatively subdued responses on growth in our panel call as well as our Quarterly Carrier Survey, we believe survey results on the macro picture are uninspiring for the near term.
Tariff Uncertainty Moderated, But Legal Complexities Loom
Following many quarters of shippers citing elevated tariff uncertainty, 70% of shippers surveyed responded that they expect “business as usual” in ordering practices. This is up 16 points sequentially and speaks to some normalized uncertainty, in our view, potentially reflected in the economic confidence response discussed above. This aligns with a comment made by North America’s largest short line railroad company on our panel call, but we remain cautious with a SCOTUS 1/14 ruling looming.
Thoughts Into Rail Earnings
M&A remains the focal point for U.S. rail group, and shares should continue to trade on STB review developments and the truck-conversion narrative for the foreseeable future, in our view. Survey results are a slight positive for underlying U.S. rail industry health as pricing and growth expectations tick up off troughs, but absolute levels are still quite low and track with relatively subdued sentiment expressed on our recently hosted railroad roundtable. Stable rail service is positive but an expected outcome amid a transformational merger review.
