The Infrastructure Influence
On Tuesday, the Senate passed a $1 trillion bipartisan infrastructure bill that both reauthorizes existing federal public-works spending and includes additional spending on roads, bridges, rail, transit, access to broadband, and improving the electrical grid, among other projects.
In the wee hours of Wednesday morning, the Senate also laid out its 2022 budget amounting to $3.5 trillion of spending that includes additional initiatives around education, health care, and climate change.
What’s the Timeline?
Let’s first acknowledge that the bill and the budget are far from done deals, they both must still pass through the House of Representatives and may change as a result of debates in that process, which could last into October. Meaning I’ll probably have to write about this again before it’s over.
What Will the Market Think?
Broad indexes have had a somewhat positive response since both announcements, but it’s hard to say if that’s due to the fiscal news or to inflation not being as terrifyingly high as feared. Either way, the reaction so far has been muted, which is historically typical—the market will care when it’s time to care.
Given that the debt ceiling will approach around the same time that the budget is trying to make its way through Congress, there could be a whopper of a debate that ensues in the fall. Depending on the length and severity of that debate, markets may see some volatility until a resolution is reached. After all, certainty, even if unpopular, is usually better digested than uncertainty.
That said, since the spending will be spread out over a number of years, the infrastructure bill may not have a huge impact on the overall market in 2022, but there are sectors and industry groups that could see a direct benefit. Namely, those levered to roads and highways, rail and transit, and water—most of which fall into the industrials or materials sectors.
The larger reconciliation bill expands spending into areas including clean energy, affordable housing, health care, education, and income transfer. The sectors and industry groups that could benefit are consumer staples, consumer discretionary, clean and renewable energy companies (e.g., charging stations, solar, energy efficiency), real estate, and various health care names, particularly those levered to Medicare and Medicaid coverage expansion.
What About Corporate Taxes?
These spending measures will be coupled with tax increase proposals in order to “pay for” a portion of the cost. Since we are focusing on markets here, I am only going to focus on the possible corporate tax increases and their projected impact on corporate earnings. In my view, the market has not yet fully priced in the prospect of tax hikes, and we may see more reaction to them in fall/early winter.
The proposal will likely include a corporate tax hike from 21% to either 25% or 28%, which could shave roughly 2% or 3.5% off projected 2022 S&P earnings. There may also be other increases beyond the scope of this piece that, combined with these tax increases, could further reduce earnings projections broadly for next year.
What’s the Bottom Line?
Clearly, while some of the proposed spending is intended to stimulate economic growth and improve our nation’s infrastructure, some of it could pose a headwind to corporations. The end goal is for the stimulative effects to outweigh the headwinds and it’s possible the final agreement can achieve that goal. In the meantime, it’s also realistic to expect the debate to bring some short-term wobbles in markets, but none that I think can derail our recovery.
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