Investing.com -- In the current volatile market, where mega-cap tech stocks are seeing fluctuations and bond yields are moving unpredictably, however, one sector shines for its relative stability and strong performance which is the U.S. infrastructure.
The attractiveness of this sector extends beyond short-term cycles, being driven by strong underlying fundamentals and supportive government policies.
Analysts at Gavekal Research flag that U.S. infrastructure investments have become a reliable refuge for investors looking for stability amidst market uncertainty.
Since mid-July 2024, the stock market has been on a roller-coaster ride, particularly for technology stocks, which have shown significant volatility. The MSCI U.S. Information Technology Index, for instance, remains 6.5% below its July peak.
“The jitters suffered last week by Nvidia (NASDAQ:NVDA) points to market leaders running on fumes,” the analysts said. In contrast, U.S. infrastructure stocks have performed exceptionally well, with the sector's MSCI benchmark reaching new highs.
One of the primary drivers of the U.S. infrastructure sector's resilience is the continued support from the federal government. President Joe Biden's 2021 infrastructure legislation, which allocates significant funding for projects through 2026, provides a strong foundation for the sector.
Moreover, infrastructure investment enjoys rare bipartisan support, as evidenced by the energy bill advanced by Senator Joe Manchin and Republican Senator John Barrasso. Regardless of the outcome of the upcoming general election, U.S. infrastructure is likely to remain a top priority, ensuring continued funding and support.
Investors seeking a safe harbor in anticipation of a potential U.S. recession might find solace in infrastructure plays. Unlike highly growth-sensitive sectors like industrials, infrastructure stocks primarily fall within the defensive communication services and utility sectors.
These sectors are known for their stable cash flows, which tend to be less affected by economic downturns. Furthermore, during a recession, interest rates are likely to drop significantly, benefiting the long-duration return profile of infrastructure stocks.
The recent volatility in large-cap tech stocks raises the question of whether the AI boom is nearing its end or simply experiencing a temporary pause. Regardless of the answer, U.S. infrastructure stocks appear well-positioned.
If the AI boom picks up again, infrastructure investments might still deliver solid performance, even if they lag behind tech stocks. However, if the AI boom is truly winding down, investors could return to infrastructure, which saw strong gains following the passage of Biden's infrastructure law in 2021.
In a comparison between U.S. infrastructure equities and large-cap tech stocks, the former offers a more attractive value proposition, particularly in the current market environment.
Although U.S. infrastructure investments are generally viewed as a safe choice, they do come with risks. A sudden increase in oil prices, potentially caused by rising geopolitical tensions, could drive up U.S. yields, which may adversely affect infrastructure stocks.
“The chance of an escalatory cycle playing out in the RussiaUkraine war and heightened tensions in the Middle East means an oil price spike cannot be ruled out,” the analysts said.
Nonetheless, Gavekal Research analysts point out that market reactions to geopolitical events are typically short-lived. Consequently, investors might see any resulting dips in infrastructure stocks as buying opportunities, given the sector’s strong fundamentals and appealing valuations.