NEW YORK — US equity investors currently have little trouble constructing a bearish market view, with rising tariffs, potential inflationary pressure, destructive global conflicts, lofty valuations and high government deficits. The list goes on. But there is one positive trend cutting across all this negativity: capital expenditure growth.
Capex refers to purchases of assets that can benefit a company long term, so an investment in the potential growth of a business for decades, not just the next few quarters.
Since 2022, S&P 500 companies in aggregate have allowed capex to grow at a faster clip than sales, something not seen in most of the prior seven years. That trend has accelerated since January, with capex growth now expected to outpace sales growth in 2025 by 9.4 percent, up from forecasts of 2.5 percent at the start of the year.
So what shifted in 2022 to prompt this change, and why has it continued?
In that year, Russia invaded Ukraine, the post-Covid return-to-work trend started picking up, and we were in the midst of a global supply shock that led to startling inflation. In response, the Federal Reserve began raising interest rates to levels not seen in decades, as did many other central banks around the world.
Following the pandemic, employee retention became all important for companies amid a worker shortage, just as many firms were also scrambling to source vital inputs like semiconductor chips. In short, managing through scarcity became a priority.
This situation likely had a significant impact on the psyche of company management, driving them to ensure they would be better prepared moving forward.
Enter capex for artificial intelligence and reshoring.
A revival in investment in non-residential structures and equipment is now evident, after a virtual drought since the early 1980s, as companies seek to reduce the likelihood that they will find themselves short of workers or vital inputs in the future.
Who are the big spenders?
One might expect capex today to be lower than in previous years, given the prospect of higher costs from tariffs as well as a host of other unknowns facing US companies. But that’s not the case, partly because of the big pockets of a few mega-cap companies.
