Investors in the US stock market are already betting on a wave of infrastructure spending

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Once again, investors are considering the prospect of a large round of long-term infrastructure spending, even as US lawmakers work towards a round of short-term relief that is expected to approach the $ 1.9 trillion price tag. President Joe Biden. Analysts have already started to “build in expectations” for infrastructure spending, as evidenced by a 25% increase in projected 2021 earnings for companies in the S&P 500 machinery sub-index since June, compared to an average increase of about 6% for companies. The broader S&P 500 Index, said Mark Hackett, Nationwide’s chief investment research officer, in an interview.

The machinery group, which along with the industrial sector in general is seen as the main beneficiary of an increase in spending on infrastructure, has recovered around 118% from its pandemic lows established last March, compared to a 78% rebound. the S&P 500. Industrials are up more than 86% from those lows, while materials stocks, which investors also expect to benefit, are up 95%. No doubt some of those gains are due to other procyclical factors, including vaccine launches, falling COVID-19 cases and two heavy burdens of short-term fiscal stimulus, Hackett said. At the same time, investors are also aware that infrastructure spending is very likely to lead to tax increases that could mitigate the rise in stocks. US Treasury Secretary Janet Yellen, in an interview Thursday with CNBC, said the tax increases on corporations and high-income individuals would be used to pay for part of Biden’s infrastructure plan. Yellen said there was no cost estimate yet for an infrastructure plan that is still in the works. In the meantime, companies that already have a “green” or green bent may be poised to benefit the most within sectors and industries that are likely to reap the benefits of an infrastructure program, said Elizabeth Vermillion, CFRA equity analyst, in a interview. That includes companies like construction equipment giant Caterpillar Inc. CAT, + 5.00%, offering a variety of alternative fuel and battery-electric equipment that could be favored as part of a Biden plan. Trucking companies could also benefit as they look to take advantage of building infrastructure for electric vehicles. Companies related to 5G mobile phone infrastructure can also benefit, he said. That includes not only operators and companies developing 5G technology, but also industrial companies that will build towers, lay cables in the ground, and build the network. At the same time, investor enthusiasm may be dampened by memories of 2016, when optimism was running rampant by a major infrastructure boost after Donald Trump‘s election victory. Those efforts failed, and “Infrastructure Week” eventually turned into a political auction. Much skepticism remains. Part of the political appeal of a large-scale infrastructure package is its ability to get people back to work. But if the economy picks up momentum as vaccine launches continue, the resulting drop in unemployment could serve to undermine enthusiasm for infrastructure spending, said Nicholas Colas, co-founder of DataTrek Research, in remarks at an organized webinar. by Capital Institutional Services. . Meanwhile, if a plan is enacted that includes corporate tax increases that reduce a portion of Trump’s cut from 35% to 21%, investors should expect to see the biggest headwinds for utility and communications stocks, the two biggest beneficiaries of the tax cut. Hackett said. The third biggest impact would be suffered by industrial companies, which would mitigate part of the rise in spending growth. It‘s not just stock market investors who are beginning to see the prospects for more infrastructure spending, Hackett said. Rising inflation expectations, in part, reflect that potential as well, as does the related rise in yields on U.S. Treasury debt.In fact, though Bank of America economists said they remained skeptical. On the inflation outlook around the world, they see the United States as an exception. Large rounds of fiscal spending already in the pipeline and perhaps to come, including up to $ 2 trillion in infrastructure spending over four years, remain an upside risk to the inflation outlook, Ethan Harris and Aditya Bhave wrote, in a note from February 5. Last week, stocks mostly ended lower, but not far from record highs, with the S&P 500 SPX losing 0.7% and the high-tech Nasdaq Composite COMP + 0.07% down 1.6 %. The Dow Jones Industrial Average DJIA, + 0.00% achieved a weekly gain of 0.1%. The next week will be closely followed by developments on Biden’s $ 1.9 billion aid spending plan. Federal Reserve Chairman Jerome Powell will testify in front of lawmakers on monetary policy on Tuesday and Wednesday. On the data front, highlights include a review of US fourth-quarter gross domestic product data on Thursday, along with weekly figures on jobless claims and a reading of durable goods orders from January.