Artificial intelligence (AI) has played a significant role in the impressive rally of U.S. stocks this year. Companies associated with AI, like Nvidia and Meta Platforms, have seen substantial increases in their stock prices. The S&P communications services and technology sectors have also experienced significant gains.

However, concerns are arising about the uncertainty surrounding AI-related stocks, leading investors to shift their focus toward industries that could benefit from government spending on infrastructure.

The Infrastructure Investment and Jobs Act, signed into law in November 2021, has driven this change in investor sentiment, as it is expected to boost public investment in infrastructure projects.

This article examines the rise of infrastructure stocks amid the AI boom and analyzes the opportunities and challenges ahead.

The AI boom has driven the stock market

The AI boom has driven the stock market rally, with companies like Nvidia and Meta Platforms leading the charge. Nvidia’s shares have surged by an impressive 205% year-to-date, while Meta Platforms has seen a 160% increase.

The S&P communications services and technology sectors have risen by over 40%, making them the top performers this year. Investors are optimistic about the potential of AI, but the AI landscape remains unpredictable, with winners and losers emerging over time.

Investors seek alternatives to expensive AI-related stocks

As investors seek alternatives to expensive AI-related stocks, they turn their attention to industries that historically underperformed the broader market. The surge in government spending on infrastructure has created opportunities for companies in the construction and engineering sectors.

The S&P 1500 construction materials and construction and engineering indexes have experienced significant gains of 33%. Nearly 23%, respectively, outpacing the broader industrials and materials sectors.

The anticipation of increased spending in construction and engineering has led investors to seek stocks that will benefit from this boost. Companies like Vulcan Materials and MasTec are considered well-positioned to capitalize on the infrastructure spending spree. The passage of the Infrastructure Investment and Jobs Act has paved the way for increased government spending on infrastructure projects, leading Morgan Stanley to raise its U.S. economic growth forecast for the year.

Projects initiated during the pandemic are gaining momentum

The injection of fiscal spending into the economy is expected to significantly impact businesses in the construction and engineering sectors. Onshoring initiatives and infrastructure projects initiated during the pandemic are gaining momentum, presenting a unique opportunity for companies aligned with these initiatives.

Investors are rewarding companies in sectors with solid earnings performance. Owens Corning, a provider of building and industrial materials, recently saw its shares reach a record high after reporting second-quarter earnings that exceeded expectations.

The S&P 500 industrials sector is expected to witness a 13.7% increase in earnings for the second quarter compared to the previous year. In contrast, the materials sector is expected to show a slight improvement in earnings decline.

Engineering sectors are likely to benefit from the increased spending

While some stocks in the construction and engineering sectors are likely to benefit from the increased spending, caution is advised. Kim Forrest, who favors specialty chemical company RPM International, warns investors to carefully evaluate the end markets of these companies, as factors like project delays or environmental concerns could impact their performance.

The rise of infrastructure stocks

The rise of infrastructure stocks amid the AI boom represents a significant shift in investor sentiment. While AI-related stocks have been driving the market rally, concerns about their long-term prospects have led investors to seek alternatives.

The Infrastructure Investment and Jobs Act has provided a catalyst for increased government spending on infrastructure, creating opportunities for companies in the construction and engineering sectors.

However, investors must exercise caution and carefully evaluate the potential risks and rewards associated with investing in these stocks. As the economy continues to recover and infrastructure projects gain momentum, the future of infrastructure stocks remains promising.

FAQs

1. What is driving the rise of infrastructure stocks? The rise of infrastructure stocks is driven by increased government spending on infrastructure projects, as highlighted by the Infrastructure Investment and Jobs Act. Investors are seeking alternatives to AI-related stocks, which have become increasingly expensive.

2. Which sectors have seen the most significant gains this year? The S&P communications services and technology sectors have risen by over 40% this year, making them the top performers. However, the construction materials and construction and engineering sectors have outpaced them, experiencing gains of 33% and nearly 23%, respectively.

3. What should investors consider when investing in construction and engineering stocks? Investors should carefully evaluate the end markets of construction and engineering companies. Factors such as potential project delays or environmental concerns could impact their performance.

4. How has the Infrastructure Investment and Jobs Act impacted the economy? The Infrastructure Investment and Jobs Act has prompted increased government spending on infrastructure projects. This has led to a boost in the industrial sector and more public investment in infrastructure, contributing to an improved economic growth forecast.

5. Are there any risks associated with investing in infrastructure stocks? While infrastructure stocks present opportunities, investors should exercise caution. Factors such as project delays and environmental concerns could impact the performance of these stocks.

First reported by REUTERS.

Featured Image Credit: Nicholas Cappello; Unsplash; Thank you!