Infrastructure and the stock market — here’s what the $1 trillion deal means

Investors have spent years weighing the prospect of a sizable infrastructure spending bill. The breakthrough was welcome after weeks of strained negotiations between the Biden administration and Republican senators earlier this year failed to bear fruit, while a push for a plan during the Trump administration turned the term “infrastructure week” into a political punchline.

Among standout winners in Thursday’s session, the Global X U.S. Infrastructure Development exchange-traded fund
PAVE,
+1.53%
jumped 1.5%, outpacing major benchmarks. The ETF is weighted toward stocks in industrials (63.4%) and materials (23.7%) that are expected to benefit most from a pickup in construction projects funded by the program.

Construction-equipment maker Caterpillar Inc.
CAT,
+2.60%,
a popular infrastructure play, was among upside leaders on the Dow, ending the day up more than 2%.

Telecom and green-energy bulls were also cheered by the deal. Josh Duitz, portfolio manager of the Aberdeen Standard Global Infrastructure Income Fund
ASGI,
-0.19%,
expects the deal to help accelerate existing trends toward increased investment in green energy and 5G that are still in their early days.

“The prospect of legislation is clearly positive, but the reality is that infrastructure investment is going to be strong going forward regardless of what happens on Capitol Hill,” Duitz said in emailed comments. “The green-energy and 5G revolutions are already happening and this bill would simply accelerate infrastructure spending.”

More generally speaking, analysts said the deal will add to the fiscal spending tailwind already contributing momentum to the reopening of the U.S. economy. What’s more, many investors are penciling in additional spending beyond the scope of the package outlined by Biden and lawmakers on Thursday.

“We will very likely get more than $2 trillion in additional spending this year —including this bipartisan agreement and a partisan ‘social infrastructure’ deal later this year, which bolsters the outlook for corporate profits and should keep this bull market going strong well beyond 2021,” said Jeff Buchbinder, equity strategist at LPL Financial.

But significant negotiations are still to come, with Biden and congressional Democratic leaders facing the challenge of securing unified support among fellow party members, noted analysts Sarah Bianchi and Tobin Marcus, analysts at Evercore ISI.

Momentum has been growing for a two-step approach to infrastructure spending. In that strategy, the bipartisan plan first would draw the 60 votes in the Senate that are needed to bypass the filibuster. Then, Democrats would go it alone to pass another, bigger spending package that includes spending on education, health care and antipoverty measures by a simple majority vote through a process known as budget reconciliation.

“Democratic leadership wants to move forward with both the bipartisan deal and the first step in the reconciliation process in July, but the timing of these steps will be delicate as Democrats try to keep both progressives and moderates on board,” said Bianchi and Marcus, in a note.

The biggest risk is that progressive Democrats find the deal to be too narrow, though that could be addressed via the second reconciliation bill, said Andrew Little, an analyst at Global X. “It will take years for this federal money to be spent, making this a continued long-term theme with powerful tailwinds.”