MW These 'cheap' stocks could get a tailwind no matter who wins the White House
By Christine Idzelis
'Our industrials team estimates that green programs would be bigger victims of cuts than manufacturing,' says BofA
A group of stocks appear ready to benefit from company spending no matter who wins the race for the White House.
Stocks that directly benefit from investment in manufacturing and infrastructure have been trading at a discount relative to the S&P 500 index. Yet they should benefit from a "capex boom" that likely would outweigh any potential reversal of Biden's programs if former President Donald Trump prevails in November's election, according to a BofA Global Research note dated July 19.
"Given the government's role in boosting manufacturing investment in 2023, a claw-back of President Biden's programs under Republican leadership is on clients' minds," said BofA equity and quantitative analysts, in the note. But "our industrials team estimates that green programs would be bigger victims of cuts than manufacturing."
Biden announced on Sunday that he was dropping out of the White House race, endorsing Vice President Kamala Harris as presidential nominee for the Democratic Party. Despite all the attention to the "benefits from fiscal stimulus in 2023," BofA estimated that it is relatively small versus overall capex for the S&P 500.
The S&P 500's capex has been slated to be about 10 times larger than fiscal stimulus through 2031, making it "likely the more important variable to watch," BofA's research found.
"Re-shoring, industrial policy, and historic underinvestment in infrastructure point to an 'old school capex boom ahead," the BofA strategists said. "We expect reshoring and ongoing infrastructure investment to be a multi-year tailwind for old economy cyclicals."
Infrastructure beneficiaries in the U.S. stock market are "cheap" versus the S&P 500 index, according to their note.
"COVID, geopolitics, and trade wars have made the case for localizing supply chains stronger than ever," said the BofA analysts. They pointed to "historic underinvestment in infrastructure," as well as industrial-related policy such as the CHIPS Act, the Infrastructure Investment and Jobs Act and the Inflation Reduction Act.
"The question is: what's priced in?," said the BofA strategists. "Structural tailwinds outweigh potential reversals of fiscal stimulus, in our view."
Infrastructure beneficiaries were generally trading at a bigger discount to the S&P 500 than at the pre-global financial crisis peak in 2007, according to their note.
"Within industrials, industrials conglomerates screens as an 'opportunity' in our quantitative tactical framework, while electrical equipment screens as a 'value trap,'" said the BofA strategists.
The U.S. stock market closed higher Monday, with the Dow Jones Industrial Average DJIA rising 0.3%, the S&P 500 SPX climbing 1.1% and the technology-heavy Nasdaq Composite COMP jumping 1.6%.
The S&P 500's industrials sector XX:SP500.20 rose a sharp 1.1% on Monday, according to FactSet data.
So far this year, the S&P 500 has rallied 16.7%, exceeding the 10.7% gain for industrials year to date, FactSet data show. Big gains from technology have lifted the S&P 500, with tech being its best-performing sector this year with a 29% surge through Monday.
See: Stock market faces crucial test: Can summer rally continue without Big Tech?
-Christine Idzelis
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July 27, 2024 05:48 ET (09:48 GMT)
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