Infrastructure Investments: Navigating the Impact of Upcoming Interest Rate Cuts

Current State of Infrastructure Investments

Amazon, Google, Microsoft, Cisco, and General Electric are all making significant infrastructure investments, ranging from road improvements and technical infrastructure to cloud, AI, and manufacturing facilities. These investments highlight a robust and diverse commitment to enhancing infrastructure across various sectors.

"In addition to its community investment and engagement activities, AWS will also contribute up to $7 million to support road infrastructure improvements being conducted by the state and local community along State Road 2 surrounding the company's planned development." --- (AMZN, press release, 2024/04/25)

"• Capital expenditures, which primarily reflected investments in technical infrastructure, were $13.2 billion for the three months ended June 30, 2024." --- (GOOG, sec filing, 2024/Q2)

"Today we announced our plans to deepen our investments in Japan, spanning cloud and AI infrastructure, skilling, research, and cybersecurity, as we continue partnering to accelerate the country's AI transformation." --- (MSFT, twitter, 2024/04/09)

"You've got, with obviously the networking business is cordos. Even outside of what we're going to do in AI infrastructure there.There's a huge amount of investment going into that space, but I think it's also important for you to get a feel that we're investing where the growth is." --- (CSCO, event transcript, 2024/06/04)

"We also recently announced we're investing more than $650 million in both our manufacturing facilities and our supply chain this year, reflecting our commitment to strengthening quality and increasing production to better support our" --- (GE, earning call, 2024/Q1)

Historical Impact of Interest Rate Changes

Higher interest rates have historically led to declines in net interest income due to increased funding costs and customer shifts to higher-yielding products, as seen in Wells Fargo and Bank of America. Conversely, Goldman Sachs and Citigroup noted sequential increases in net interest income from higher-yielding assets and market-driven changes.

"Turning to Slide 4. Net interest income declined $1.1 billion or 8% from a year ago due to the impact of higher interest rates on funding costs, including the impact of customers migrating to higher yielding deposit products as well as lower loan balances, partially offset by higher yields on earning assets." --- (WFC, earning call, 2024/Q1)

"Net interest income decreased $447 million to $3.5 billion primarily due to the impact of interest rates, partially offset by the benefit of higher average deposit balances." --- (BAC, sec filing, 2024/Q1)

"In the second quarter, we further reduced our historical principal investment portfolio by $2.2 billion to $12.6 billion. On page nine, firmwide net interest income was $2.2 billion in the quarter, up sequentially from an increase in higher yielding assets and a shift towards non-interest bearing liabilities." --- (GS, earning call, 2024/Q2)

"In the first quarter, net interest income decreased by $317 million, largely driven by markets, which resulted in a 4 basis point decrease in net interest margin." --- (C, earning call, 2024/Q1)

"These scenarios consider many different factors, including: • The impact on exposures as a result of instantaneous changes in interest rates from baseline rates." --- (JPM, sec filing, 2024/Q1)

Sector-Specific Impacts

Interest rate cuts are expected to have varied impacts across sectors. In energy, companies like NextEra Energy and Duke Energy are shifting capital towards renewables and infrastructure, anticipating flat growth in gas infrastructure. Telecommunications giants Verizon and AT&T foresee reduced interest expenses and improved cash flow due to lower financing costs.

"While we may see a few pennies impact again next quarter, we expect gas infrastructure's earnings growth to be effectively flat going forward as we continue to allocate more capital on a relative basis to renewables, storage and transmission. Similar to what we saw this quarter, the increased contributions from new investment driven by the strength of our renewable development program are expected to more than offset any slowing in gas infrastructure growth going forward." --- (NEE, earning call, 2024/Q2)

"The impact of a 100-basis-point change in interest rates affecting our floating rate debt would result in a change in annual interest expense, including our interest rate swap agreements that are designated as hedges, of approximately $389 million." --- (VZ, sec filing, 2024/Q2)

"But we feel like we've got a credible plan in place, and it will be executed over the number of years, fully recognizing that it takes a lot of work with stakeholders to not only build the generation, but working with our partners who are putting pipeline infrastructure in place to make sure that the stakeholder concerns and needs are being met and so we're confident we've got a plan in place we can execute." --- (DUK, earning call, 2024/Q1)

"We expect to continue reducing our aggregate net balance of direct supplier and vendor financing on a year-over-year basis, which should lower our interest expense and continue to improve cash flow ratability over time. DIRECTV distributions in the quarter were about $740 million, and we continue to expect DIRECTV cash distributions to decline at a" --- (T, earning call, 2024/Q2)

"Corporate and Other's results increased $212 million during the six months ended June 30, 2024 primarily due to more favorable after-tax impacts of approximately $187 million, as compared to the prior year period, related to non-qualifying hedge activity as a result of changes in the fair value of interest rate derivative instruments. LIQUIDITY AND CAPITAL RESOURCES" --- (NEE, sec filing, 2024/Q2)

Funding Strategies Amid Rate Cuts

Upcoming rate cuts can facilitate financing and potentially lower asset prices, making acquisitions more favorable (BX). Despite fewer rate cuts, clients are re-risking into equities and bonds (BLK). Strong infrastructure strategy performance positions firms to meet global funding needs (BX), while cash strategies remain attractive (BLK).

"In some ways, it's helpful for financings but it also can drive prices up. From our perspective, because we're buying assets so often for longer periods of time, the fact that a rate cut may happen 90 days or 180 days later is not really a long term negative and if anything, allows us to get into some assets at more favorable pricing." --- (BX, earning call, 2024/Q1)

"Although cash remains an attractive safe haven with the prospect of fewer rate cuts for 2024, the nearly 30% increase in equities over the last year continues to propel clients towards re-risking into stocks and bonds." --- (BLK, earning call, 2024/Q1)

"Performance has been exceptional. With the commingled BIP strategy generating 16% net returns annually since inception, beating the public infrastructure index by nearly 1,100 basis points per year.We are well positioned to address the massive funding needs for our infrastructure projects globally, including digital and energy infrastructure." --- (BX, earning call, 2024/Q2)

"of $30 billion were driven by government and international prime funds. Flows benefited in part from clients reinvesting in cash strategies in early April after redeeming balances during the last week of March." --- (BLK, earning call, 2024/Q2)

"In addition, although certain of our strategies are designed to benefit from a high interest rate environment, a period of sustained high interest rates combined with weak equity markets would make it difficult for funds in certain of our strategies to exceed interest rate-based performance hurdles to which such funds are subject." --- (BX, SEC filing, 2024/Q1)

Financing Tactics for Infrastructure

Financing infrastructure investments requires diverse tactics, including scaling investments through necessary infrastructure and power (GS), evolving financing needs and market access (WFC), providing growth funding and financial management solutions (JPM), sustainable finance goals for low-carbon transitions (BAC), and integrated financing and securitization capabilities (C).

"But broadly speaking, these technologies require certain things, including infrastructure, power, and these things require financing to drive the scale that's going to be necessary for people to execute on the investments that they see as important to keep their businesses competitive at pace." --- (GS, earning call, 2024/Q1)

"And as people's financing needs have evolved and the ways for people to access the markets and the types of services they want, whether it's hedging services or accessing public and private markets, the opportunity for us to expand our capabilities to serve them, it's both an opportunity, but it's also imperative." --- (WFC, conference, 2024/05/29)

"For low-income groups especially, the programme will help accelerate the development of sustainable financial management solutions, including providing access to growth funding or fintech founders that might otherwise have difficulty securing additional capital." --- (JPM, press release, 2024/05/14)

"In line with this approach, we have set interim 2030 targets across our financing activities related to certain high-emitting sectors (2030 Financing Activity Emissions Targets), operations and supply chain, all of which are further supported and complemented by our $1.5 trillion sustainable finance goal (which is aligned with the 17 UN Sustainable Development Goals) of which $1 trillion is dedicated to supporting the transition toward a low-carbon economy, including capital mobilized across clean energy sectors and tailored financial solutions for emerging areas of the low-carbon economy." --- (BAC, sec filing, 2024/Q1)

"We have fully integrated our financing and securitization capabilities, and we're beginning to really see the benefits of a unified spread product offering for clients. We've also been making strides in equities, notably increasing balances in" --- (C, event transcript, 2024/06/18)

Future Outlook and Predictions

Companies are optimistic about future infrastructure investments, focusing on specific short-term impacts, ongoing supply chain improvements, and advancements in AI, data, and cybersecurity. Strategies remain simple and future-oriented, emphasizing safety and quality.

"I think we're at the stage now where we're doing both at the same time continually, so we are more apt to talk about the specific investments that we're making and how that might impact our short-term outlook." --- (AMZN, earning call, 2024/Q1)

"So the supply chain topic is still relevant. I suspect we'll be talking about it again for the foreseeable future, but I'm very encouraged by the progress that we're making. We just need to make a whole lot more." --- (GE, earning call, 2024/Q1)

"As we look to the future, we obviously are optimistic about AI, both from an infrastructure perspective, a data perspective as well as a cybersecurity perspective." --- (CSCO, earning call, 2024/Q3)

"Turning to Slide 6, as you heard from us last month at our Investor Day, we are keeping our strategy simple, focused on today, tomorrow and the future with safety and quality first." --- (GE, earning call, 2024/Q1)

"So the supply chain topic is still relevant. I suspect we'll be talking about it again for the foreseeable future, but I'm very encouraged by the progress that we're making." --- (GE, earning call, 2024/Q1)

Regulatory and Policy Considerations

Companies are actively engaging with stakeholders to advance regulatory mechanisms and policies, while also preparing for various regulatory outcomes. Efforts include reducing regulatory burdens and appealing unfavorable decisions, highlighting the critical role of regulatory and policy considerations in infrastructure investments.

"And to the extent that we can do better, we absolutely will. And then I think from a regulatory perspective, I think a lot of the comments reflect going into a rate case for next year and being cognizant of the realities of a great story going into the regulator, but there's a lot of outcomes and you need to be prepared for managing a variety of those potential solutions." --- (NEE, Investor Day, 2024/06/11)

"In 2023, we worked with a broad range stakeholders to help advance regulatory mechanisms and policies at the state and federal levels that we need to be successful as we advance our clean energy transition." --- (DUK, AGM, 2024/05/09)

"We continue to support regulatory and legislative measures and efforts, at both the state and federal levels, to reduce inappropriate regulatory burdens that inhibit our ability to compete effectively and offer needed services to our customers, including initiatives to transition services from traditional networks to all IP-based networks." --- (T, sec filing, 2024/Q2)

"Industry groups have appealed this decision in court. Except as disclosed herein, there have been no material changes to regulatory trends as previously disclosed in Part I, Item 1." --- (VZ, sec filing, 2024/Q2)

"Actual future results, including project plans, schedules, initial capacities, production rates, and resource recoveries could differ materially due to: changes in market conditions affecting the oil and gas industry or long-term oil and gas price levels; political or regulatory developments including obtaining necessary regulatory permits; reservoir performance; the outcome of future exploration efforts; timely completion of development and construction projects; technical or operating factors; and other factors cited under the caption 'Factors Affecting Future Results' on the Investors page of our website at exxonmobil.com and under Item 1A." --- (XOM, press release, 2024/04/12)