Following $7 trillion in total federal and state COVID-19 relief, investors are now so used to seeing uber-sized spending bills from Washington that the roughly $1 trillion traditional infrastructure bill just passed in the Senate might look like a trifle. But it’s not. It represents the largest level of spending in some key infrastructure categories and should make headway in upgrading and renewing the nation’s infrastructure.
Overall, we view the infrastructure bill as supportive of economic growth and the market. But it doesn’t meaningfully change the narrative. Among economists who have forecast its impact, thus far we’re seeing estimates that it could add between 0.1 and 0.3 percentage points to GDP growth in each of the next few years.
We think much of the benefit has already been factored into the recent stock market rally. While the bill is positive for the Materials and Industrials sectors—particularly for companies focused on building materials, construction, energy grid transformation, and green infrastructure—this is not something that RBC Capital Markets’ equity strategist or the strategists from our national research correspondents are focused on as a major market catalyst going forward.
We think the infrastructure bill will eventually pass in the House of Representatives and will be signed into law, likely sometime this autumn.
House Speaker Nancy Pelosi’s maneuver to directly tie this bill to the fate of a much larger and more controversial $3.5 trillion budget package may ultimately be relaxed or modified for two main reasons:
- There are already at least 110 industry and other lobbying groups backing the infrastructure bill, including the influential U.S. Chamber of Commerce, National Association of Manufacturers, Business Roundtable, and National Governors Association.
- The bill passed the Senate by a wide enough bipartisan margin to sufficiently generate additional momentum in the House. Lobbyists, the White House, and even some Republicans will work hard to get this bill past the finish line—regardless of what happens to the separate $3.5 trillion budget bill. We think there will be pressure on Pelosi to pass the infrastructure bill.
Key components of the Infrastructure Investment and Jobs Act
- Roughly $1 trillion in infrastructure spending over next 10 years, including $550 billion in new spending over next five years
- No broad tax hikes on corporations, individuals, or estates in this bill
- Passed the Senate by a vote of 69-30 (50 Democrats, 19 Republicans); bill is now with the House of Representatives for consideration, timing TBD
- Estimated to add $256 billion to the deficit
- Largest-ever federal investment in public transit
- Largest investment in passenger rail since creation of Amtrak
- Largest investment in bridges since interstate highway system was constructed
- Largest-ever investment in clean energy transmission and electric vehicle infrastructure
Major new spending provisions
- $110 billion – Roads, bridges, etc.
- $66 billion – Passenger & freight rail
- $11 billion – Highway & pedestrian safety; pipeline safety & repair
- $39.2 billion – Public transit
- $65 billion – Broadband deployment (high-speed internet)
- $25 billion – Airports
- $17.4 billion – Ports & waterways
- $54 billion – Water infrastructure
- $65 billion – Power reliability & green energy
- $46 billion – Cybersecurity & disaster mitigation
- $7.5 billion – Electric vehicle charging
- $7.5 billion – Low-carbon & zero-emission school buses & ferries
- $21 billion – Legacy pollution (brownfield & Superfund sites, etc.)
Source - RBC Wealth Management, “Bipartisan Infrastructure Investment and Jobs Act Summary” from portman.senate.gov, whitehouse.gov, Los Angeles Times, Reuters, Forbes, The Hill, Congressional Budget Office
Curtain rises on the budget political theater
There are no broad tax hikes in the traditional infrastructure bill. Instead, we expect tax hikes on corporations and/or higher-income individuals to be included in the $3.5 trillion follow-on budget bill that largely focuses on new and existing social programs and climate initiatives, and includes a revamp of immigration laws. There are a lot of uncertainties about its specific provisions, as they have yet to be nailed down.
In order for a large, wide-ranging budget bill to pass, we think the scope of the legislation will need to be narrowed and the price tag lowered.
Due to Senate parliamentary rules, the budget bill can’t be filibustered; only 50 votes are required to pass it. But Democrats will need all 50 of their members to support the legislation because Republican senators have vowed to oppose it. House Democrats will need to deliver almost all of their members due to their razor-thin majority and Republican opposition.
There are already fissures within the Democratic caucus. Two moderate Democratic senators, West Virginia’s Joe Manchin and Arizona’s Kyrsten Sinema, have strongly objected to the $3.5 trillion price tag and have leveled other criticisms, and a group of at least six moderate Democratic House members has formally raised concerns about the package. But on the other side of the Democratic ideological divide, it’s unclear just how much progressives would be willing to change the bill’s priorities and reduce its price tag.
Even a “smaller” bill of, say, $2 trillion or less would likely require tax hikes to offset the spending, in our view.
For this reason, some Wall Street equity strategists have incorporated a corporate tax hike into their 2022 earnings models. The consensus assumption among this group is that the corporate tax rate would rise from 21 percent to 25 percent, lower than the Biden administration’s original target of 28 percent and still well below the 35 percent rate that prevailed before former President Donald Trump’s tax cuts took effect. Manchin previously signaled he would support such a tax hike.
In this scenario, one of our national research correspondents’ 2022 S&P 500 earnings forecast is for $230 per share, which would represent 9.5 percent year-over-year profit growth, instead of $240 per share without a tax hike. We think the market could absorb this modest headwind given that it’s still early in the economic recovery cycle.
While tax hikes on high-income individuals, investments, and large estates also could be included in the budget bill, there is currently a great deal of uncertainty on this front. And the ultimate size of the bill could play a role—the smaller the size, potentially the lesser the tax hikes.
Even though the prospect of tax hikes typically creates angst for investors and, if implemented, can directly hit pocketbooks in non-trivial ways, historically the stock market has been able to cope. RBC Global Asset Management has found that U.S. equity markets have exhibited an ability to remain resilient through all but one of the 13 instances of tax increases since 1950. For this legislation, we think Wall Street would likely view any negative economic drag from tax hikes as being largely offset by the stimulative nature of the bill’s spending provisions.
Bottom line: Democrats have the ability to pass a budget bill focusing on social spending and climate initiatives without one Republican vote. It’s just unclear at this stage whether the various factions in the party can come to an agreement, and what such an agreement might look like. The debate could get interesting.