John Coletti/Getty Images
American infrastructure is in bad shape, and that might make it a better bet than top sectors like artificial intelligence, Bank of America said in a note Monday.
Analysts say that heavy investment in AI could prop up US infrastructure as manufacturing needs expand, while infrastructure investments themselves remain cheap relative to the rest of the market.
The country, in other words, is due for "a long and strong 'old school' capex boom" that should help old economy stocks in areas like manufacturing and infrastructure gain.
BofA's optimism stems from infrastructure's relative value, with the sector trading at a discount to the S&P 500.
Meanwhile, tech companies are set to spend over $1 trillion on AI — even though they will likely wait several years before they see a return on investment, a Goldman Sachs report says.
"AI/TMT capex beneficiaries are pricing in strong growth after a year of momentum. But monetization may be years away, and grid/infrastructure/manufacturing capacity present a bottleneck," the analysts wrote.
"AI adoption has accelerated growth in electrical, thermal, and HVAC manufacturers…But unlike TMT, these sectors haven't priced in as strong growth. Manufacturing/infrastructure investment beneficiaries mostly trade at discounts to the S&P 500."
As infrastructure investment has slowed, manufacturing activity has only sped up, taxing increasingly older infrastructure, and America's roads, bridges and transportation systems show it.
The American Society of Civil Engineers gave US infrastructure a C- in its most recent scoring in 2021.
President Biden's administration has aimed to boost US infrastructure spending with three bills, and the analysts expect that the initiatives will remain in place even if Republicans notch gains in the November election.
"Even with a fading fiscal impulse and claw-back potential post-election, we are sanguine," analyst Savita Subramanian wrote, adding that a Republican presidency would be more likely to impact climate change programs than manufacturing and infrastructure.
The Biden administration's aim for more manufacturing has been challenged by a labor shortage as unemployment remains low, although recent numbers show a slight uptick.
The Bank of America analysts aren't the first to point to a need for increased attention to US infrastructure and industrialization. Investment manager Richard Bernstein has said for years that the US economy needs an "industrial renaissance," and more recently noted that inflation could get worse if it doesn't.
