Cconstruction and engineering company stocks like Aecom (ACM) , Jacobs Engineering Group (JEC) and Fluor (FLR) have made big gains since Donald Trump's upset win in last Tuesday's election in anticipation of his proposed massive infrastructure investment. As of Thursday's close those shares added 37%, 20.4% and 13.3% respectively since the Nov. 8 election.
Anticipation for infrastructure is at a fever pitch, but political and economic realities are applying the brakes to the Trump Train. It's no coincidence that the aforementioned construction stocks are all either down or virtually flat Friday. The machinery companies are also facing similar resistance.
Deutsche Bank analyst Chad Dillard made the case to clients in a research note Friday morning that the sector's rally in response to Trump's victory and his decade-long, $1 trillion infrastructure initiative has gone too far - and too fast.
The Trump plan revealed in an October policy memo from his campaign calls for that $1 trillion investment to be raised entirely through public-private partnerships (P3s). To acquire the estimated $167 billion in equity needed (the rest would be debt), the Federal government would need to offer an 82% tax credit to the private investors, according to the memo.
There's a few problems with that plan, as Dillard explained in a phone interview.
"It's pretty state-dependent," he said. "My view is that you have basically 60% of the states that have laws in place [for P3 projects]."
New York and New Jersey are among the 17 states without P3 legislation. If Trump's administration pushes P3 infrastructure legislation, the effects of it may be delayed as the holdout state assemblies pass their own P3 bills into law, or, they may be limited solely to the states with P3 laws already on the books.
"If [the infrastructure bill's] not going to be P3, your other options are some combination of some public and some private from a funding perspective, or all public," Dillard said.
The latter of those alternatives would likely not mesh well with the budget deficit if Trump follows through on his stated plans to cut corporate taxes - or Republicans' desires to rein in deficit spending.
The sheer lack of shovel-ready infrastructure projects right now is another mitigating factor in the polocy's efficacy.
There's only $60 billion worth of P3 projects in planning or searching for bidders. The lag time in development for new projects may further delay the legislation's effects.
As a result, engineering and construction companies likely won't make their biggest gains from Trump's infrastructure plan until 2019 or 2020, Dillard wrote.
Overexcitement or no, the Republican majorities in the House and Senate will give Trump an edge if he wants to push an infrastructure bill through - not to mention Democrat leaders like Chuck Schumer and Nancy Pelosi's expressions of willingness to work with Trump on such a deal.
"There will be a pretty healthy debate in Congress," Dillard said. "But the new administration and the lineup of Republicans... from the President down to congress makes the pass easier than it would be today."