Analysis: While AI takes the spotlight, infrastructure stocks shine

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., July 26, 2023. REUTERS/Brendan McDermid/File photo

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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