S&P 500 companies have ramped up their capital expenditures (CapEx) for the ninth straight quarter, following years of underinvestment, according to research from Bank of America.
Key Takeaways
- S&P 500 companies have ramped up capital expenditures for the ninth straight quarter.
- Nonresidential fixed investment—a proxy for capital expenditures—grew at a 7.7% seasonally-adjusted annual rate in the second quarter.
- It’s a turnaround from the past decade and a half when companies prioritized share buybacks at the expense of capital investments in the aftermath of the Great Recession.
- Bank of America analysts are forecasting more growth in CapEx due to a combination of reshoring, fiscal stimulus, government incentives to boost manufacturing, and a rise in automation spurred by a tight labor market.
Nonresidential fixed investment by S&P 500 companies—a proxy for capital expenditures—grew at a 7.7% seasonally-adjusted annual rate in the second quarter. Despite a slowdown from recent quarters, it marks the ninth quarter of year-over-year gains.
So far, 254 companies in the S&P have reported earnings. Of the companies reporting so far, 66% have increased CapEx.
By sector, CapEx gains were strongest within the materials, utilities, and consumer staples sectors. These individually accounted for more than 20% of the overall increase in expenditures among S&P 500 firms.
Bank of America analysts are forecasting a rebound in CapEx investment due to a combination of reshoring, fiscal stimulus, government incentives to boost manufacturing, and a rise in automation spurred by a tight labor market.
The increased spending marks a turnaround from the past decade and a half. Since the global financial crisis, S&P 500 companies have generally prioritized share buybacks over investing in new equipment and facilities, despite one of the most accommodative credit environments in history, as the Federal Reserve slashed interest rates to zero and unleashed trillions of dollars in quantitative easing (QE) to stimulate the economy in the aftermath of the Great Recession.
Since the financial crisis, of every dollar raised in revenue or borrowed, 24 cents have been spent on share buybacks, versus just 13 cents prior to 2008. By contrast, the share spent on CapEx fell to 38 cents from 53 cents. The underinvestment in fixed assets in the years after the financial crisis resulted in very limited growth in U.S. manufacturing capacity.
Capital expenditures are funds used by a company to acquire, upgrade, and maintain physical assets such as property, plants, buildings, technology, or equipment. CapEx is often used to undertake new projects or investments by a company.
