The Case for Undervalued Construction and Infrastructure Stocks in a Rate-Cutting Cycle

The Federal Reserve's recent pivot toward rate cuts has reignited interest in sectors historically poised to thrive in low-rate environments. Among these, construction and infrastructure stocks stand out for their resilience and value-capture potential. As borrowing costs decline, these industries—deeply tied to capital-intensive projects and public-private investment—offer a compelling case for long-term investors. By analyzing historical performance and the competitive positioning of industry leaders, it becomes clear that construction and infrastructure equities are not just cyclical plays but strategic assets in a rebalancing market.

Historical Resilience: A Blueprint for Value Capture

Construction and infrastructure stocks have consistently outperformed during past rate-cutting cycles, driven by their sensitivity to lower financing costs and demand for capital projects. For instance, during the 2020–2021 rate-easing period, the construction materials sector surged as the U.S. MBA 30-Year Mortgage Rate dropped from 3.8% to 3.1%. This decline spurred a 7% average gain in the sector over 28 days, as housing starts rebounded and demand for building materials like lumber and steel surged. Similarly, construction-tech firms such as Autodesk (ADSK) and Trimble (TRMB) outperformed traditional homebuilders, leveraging digital tools to offset margin pressures from material tariffs and labor shortages.

Electric utilities, another infrastructure sub-sector, have also demonstrated resilience. Companies like NextEra Energy (NEE) and Dominion Energy (D) have benefited from long-term structural tailwinds, including grid modernization and the electrification of transportation. During the 2020 rate plunge, NEE's stock rose 22% year-over-year, outpacing the S&P 500's 14.1% average return in the 12 months post-first rate cut. This performance underscores the sector's ability to generate stable cash flows even in volatile markets.

Competitive Positioning: Industry Leaders in a Low-Rate Environment

The construction and infrastructure sector is home to firms with durable competitive advantages, particularly those aligned with technological innovation and policy-driven growth. Caterpillar (CAT), for example, has capitalized on the AI-driven capital expenditure (capex) super-cycle, with its Power Generation segment seeing robust demand from data centers and industrial clients. In the 2025 rate-cutting cycle, CAT's stock surged 19.1% over three months, reflecting its role in building the physical infrastructure for a digital economy.

Similarly, Mohawk Industries (MHK) and Builders FirstSource (BLDR) have leveraged lower borrowing costs to expand their market share in residential construction. BLDR's stock gained 8% following the September 2024 rate cut, as investors anticipated a rebound in homebuilding activity. These firms exemplify how construction companies with strong balance sheets and scalable business models can outperform in a low-rate environment.

The Case for Electric Utilities Over Gas

While construction materials and tech firms thrive in rate cuts, the utilities sector presents a stark contrast. Gas utilities have historically underperformed during low-rate periods, averaging a -5% decline over 42 days after unexpected rate drops. This is due to declining per-unit gas consumption as households shift to energy-efficient appliances and smaller homes. Conversely, electric utilities are insulated by long-term contracts and policy tailwinds. For instance, Dominion Energy's regulated infrastructure and investments in renewable energy have positioned it to outperform peers, even as gas utilities face existential risks from decarbonization trends.

Strategic Implications for Investors

As mortgage rates are projected to decline further—reaching 6.00% by 2027—investors should prioritize construction-tech innovators and electric utilities while underweighting traditional gas utilities. The Inflation Reduction Act and Infrastructure Investment and Jobs Act provide additional tailwinds, incentivizing modernization projects that align with these sectors.

For example, Trimble (TRMB) and Autodesk (ADSK) offer exposure to housing demand without the volatility of raw material producers, while NextEra Energy (NEE) benefits from grid modernization and renewable integration. Meanwhile, companies like Caterpillar (CAT) are uniquely positioned to capitalize on the AI-driven infrastructure boom, with their equipment essential for data centers and industrial expansion.

Conclusion: Building a Resilient Portfolio

The construction and infrastructure sector's historical performance during rate-cutting cycles, combined with the competitive positioning of industry leaders, makes a compelling case for long-term value capture. As the Fed continues to ease policy, investors who overweight construction-tech innovators and electric utilities—while avoiding vulnerable gas utilities—will be well-positioned to navigate the rebalancing market. In a world where tangible assets and policy-driven growth are paramount, these sectors offer a blueprint for resilient, inflation-protected returns.