Ready for Action: Infrastructure Advancements Detailed, Boosting Expectation for "Cyclical" Economy Fields
In a positive turn of events, progress on an infrastructure deal has sparked a cautiously optimistic outlook for cyclical sectors such as Industrials and Materials. The potential increase in government spending on infrastructure-related projects could drive higher demand for industrial production and raw materials.
### Industrials Sector Outlook
The Industrials sector stands to benefit significantly from the infrastructure deal, with the boost in demand for new building projects, machinery, equipment, and transportation services. This optimism is supported by strong manufacturing productivity gains and potential investments by companies like Caterpillar and Boeing. However, ongoing tariffs on key inputs such as steel and aluminum, and the possibility of a manufacturing slowdown or recession, could pose risks to the sector's earnings performance.
### Materials Sector Outlook
The Materials sector, sensitive to economic cycles, could also see a rise in profitability due to increased demand for raw materials and commodities from infrastructure development. However, the sector remains vulnerable to fluctuations in global commodity prices, a strong U.S. dollar that weakens foreign sales, and sluggish growth in major economies outside the U.S. Any extended global economic weakness could blunt the sector’s gains despite infrastructure spending.
### Broader Cyclical Sector Context
The Federal Reserve’s stance, with yields remaining elevated and a terminal rate forecast around 5.5%, currently challenges growth stocks. However, a potential early rate cut could ignite a cyclical sector rebound. The infrastructure progress also aligns with broader M&A and investment trends, where there is substantial capital formation aimed at infrastructure, including digital infrastructure and energy, indirectly supporting cyclical sectors.
### Market Overview
The stock market is currently showing a green tint, with the government's final Q1 GDP estimate remaining at 6.4%. Despite this positive news, there is a potential lack of major rally or downturn in the big indices due to a Fed meeting and earnings coming up. The market is out of the earnings cycle, but interesting earnings will be released today from FedEx and Nike.
Lumber prices have recently fallen sharply from their highs, with a surge of new production at sawmills helping account for the price weakness. Crude oil prices have also dipped below $73 due to reports of potential increased production by OPEC and Russia, with CME futures pointing toward prices dropping into the high $60s per barrel by late this year and even lower in 2022.
Initial jobless claims were higher than expected at 411,000, and there is key inflation data due tomorrow with May Personal Consumption Expenditure (PCE) prices. Some investors are looking for an earnings story that can make them want to own a particular stock for the long-term, while others want momentum into earnings with a stock but not necessarily past that.
In conclusion, while the infrastructure deal provides a positive outlook for Industrials and Materials, it's important to remember that risks from tariffs, potential economic slowdown, and commodity price volatility remain significant considerations. If the Fed eases monetary policy sooner than expected, cyclicals like Industrials and Materials stand to gain more significantly. This article was published in Benzinga by JJ Kinahan.
Investors may find opportunity in the booming infrastructure deal, as the Industrials sector could witness substantial growth from increased demand for machinery, equipment, and transportation services. This expansion could prompt companies like Caterpillar and Boeing to invest more in their manufacturing capabilities. On the other hand, the Materials sector, which is sensitive to economic cycles, could see its profitability soar due to increased demand for raw materials and commodities from infrastructure development. However, potential risks such as volatile commodity prices, a strong U.S. dollar, sluggish growth in major economies, and ongoing tariffs on key inputs could impact the earnings performance of these sectors.
