3 Things Investors Need To Know About The $4 Trillion Infrastructure Plan: Part 2

Here in part 2, we'll examine what this potentially stronger economic growth means for corporate earnings and the stock market.

According to Bank of America's economists (also part of the blue-chip consensus), 1% faster GDP growth translates into about 3.5% faster corporate earnings growth over time.

Today the bottom-up consensus long-term EPS growth forecast from FactSet is 8.5% CAGR. Historically, analysts tend to overestimate by 2% to 3%, and adjusting for the historical probability of recession (14%) that would be 6.4%.

(Source: FAST Graphs, FactSet Research)

Including the pandemic and post-pandemic recovery, earnings have grown at 8.5% CAGR for the last four years, and that's what analysts expect to continue.

If the economy were growing 1% faster, as Moody's expects if the $4 trillion infrastructure bills pass, then earnings growth could potentially jump to 11.5% to 12.5% CAGR through 2031.

That could have massive implications for your portfolio.

For context, here's the return potential of the 29% overvalued S&P 500.

(Source: FAST Graphs, FactSet Research)

(Source: FAST Graphs, FactSet Research)

But here's what happens if 1% faster GDP growth drives 3% to 4% faster EPS growth.

(Source: FAST Graphs, FactSet Research)

(Source: FAST Graphs, FactSet Research)

7% to 8% annual returns is basically is what the market has historically delivered, and despite the market being 29% overvalued, it could deliver historical returns if the $4 trillion infrastructure bills live up to Moody's expectations.

But wait it gets better!

The average market pullback is 7% and the average correction is 14%.

We're now historically overdue for a pullback, and Bank of America expects a correction this year due to high market valuations.

So let's take a look at what happens to expected 5-year total returns for stocks after both a historically average pullback, and correction, if the economy is growing 1% faster and corporate earnings 3% to 4% faster.

(Source: FAST Graphs, FactSet Research)

(Source: FAST Graphs, FactSet Research)

A historically normal pullback or correction, combined with 1% faster economic growth could help the market deliver historically normal and attractive returns over the next five years.

And if the market returns to fair value? That requires a 21% bear market, such as we saw in 1990.

What would the market's returns look like if the $4 trillion infrastructure boosts GDP growth by 1% over the next decade?

2% yield + 11.5% to 12.5% EPS growth = 13.5% to 14.5% CAGR.

In other words, $4 trillion in infrastructure spending could not only minimize the chances of a severe bear market this decade, but it could help fuel an epic 20-year bull market that allows the market to rise 500% or 6X from the March 2009 lows.

But while that's great news for index investors, what if you're looking for individual stocks to profit from the potential $4 trillion infrastructure gold rush?

In parts three and four of this series, coming next week, we'll look at some blue-chip bargains that could soar if infrastructure passes, and could help you achieve returns strong enough to deliver the rich retirement you deserve.