Analysis: While AI takes the spotlight, infrastructure stocks shine

RPM International

04/08/2023 14:26

By Chuck Mikolajczak
       NEW YORK, Aug 4 (Reuters) - U.S. stocks have rallied
this year, largely on the back of companies with ties to
artificial intelligence (AI), but as those shares become
expensive, investors are turning towards firms set to benefit
from government spending on infrastructure.
    Nvidia  NVDA.O  shares have surged almost 205% year to date,
while Meta Platforms  META.O  has surged about 160% as investors
anticipate the potential AI may unlock. The S&P communications
services  .SPLRCL  and technology  .SPLRCT  sectors have risen
more than 40% to be the best performers so far this year.
        
    But while concerns grow that not all AI-related stocks will
reap the benefits of the technology's promise and as hopes for
an economic soft landing have grown, investors are looking at
stocks in industries that have underperformed the broader S&P
500  .SPX .
    "In technology, nobody ever guesses at the beginning who is
the loser," said Kim Forrest, chief investment officer at Bokeh
Capital Partners in Pittsburgh. 
    Morgan Stanley recently raised its U.S. economic growth
forecast for the year on a strong industrial sector and more
public investment in infrastructure, citing the Infrastructure
Investment and Jobs Act that was signed into law in November
2021.
    That spending has led investors to search for stocks that
will reap the benefits of the boost in spending in construction
and engineering. 
    While the S&P 1500 industrials sector  .SPCOMI  has risen
nearly 13% so far this year and the materials  .SPCOMM  one
about 8%, those gains have been dwarfed by the 33% surge in the
S&P 1500 construction materials  .SPCOMCOM  and nearly 23% jump
in construction and engineering  .SPCOMCONT  indexes. 
    
    "The whole onshoring initiatives, all the infrastructure,
fiscal spending that came through during the pandemic - in
people’s minds that was done two, three years ago but the
reality is that money hasn’t even gone into the economy yet - it
is just now hitting," said Bryant VanCronkhite, senior portfolio
manager at Allspring Global Investments in Menomonee Falls,
Wisconsin, in an interview with Reuters. 
    "So we are looking at businesses that are in the crosshairs
of those initiatives."  
    VanCronkhite said he views companies such as Vulcan
Materials  VMC.N  in the materials space and MasTec  MTZ.N 
among industrials as well positioned to benefit from that
spending. 
    Investors have rewarded companies in sectors that have
reported strong earnings. Last week, Owens Corning  OC.N  shares
climbed to a record high of $143.67 after the provider of
building and industrial materials reported second-quarter
earnings that handily beat expectations. 
    Earnings for the S&P 500 industrials sector  .SPLRCI  are
expected to rise 13.7% for the second quarter from the year-ago
period, up from 6.7% on July 1, while the materials sector is
expected to show a decline of 26.4%, a slight improvement from
the 28% fall seen on July 1, according to Refinitiv data. 
    But while some stocks in the sector are likely to reap the
benefits of the spending spree, not all are likely to do so and
caution is warranted, said Forrest, who favors specialty
chemical company RPM International  RPM.N . Forrest cited the
potential for projects to be delayed or jeopardized due to
environmental concerns, for example.
    "You have to look harder at these companies about what their
end market really is, even though they're in a sector."

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Year to date index performance    https://tmsnrt.rs/3KqzixG
AI YTD performance    https://tmsnrt.rs/3DNqJch
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 (Reporting by Chuck Mikolajczak; additional reporting by Lance
Tupper,
Editing by Louise Heavens)
 ((charles.mikolajczak@tr.com; @ChuckMik;))