COLUMN-Corporate spending binge could spur long-term US growth: Guild

By Stephanie Guild

NEW YORK, July 1 (Reuters) - U.S. 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%, up from forecasts of 2.5% 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 U.S. companies. But that’s not the case, partly because of the big pockets of a few mega-cap companies.

While just over half of the companies in the S&P 500 are expected to increase their capex in 2025, seven of them are expected to grow it by more than 100%. These include Costar Group, Super Micro Computer, and of course, Oracle. In terms of absolute dollars spent, four of the top ten are ‘Magnificent 7’ high-tech companies, and they are spending a lot. These top 10 capex spenders are shelling out an average of $37 billion in 2025.

For the 69 S&P 500 companies with greater than 30% capex growth, there are a few key secular themes driving their massive outlays.

First, there is growing adoption of AI by well-known chipmakers and hyperscalers, probably the most obvious trend. Relatedly, energy and utility companies are shelling out billions, with the help of these tech giants, for technology and infrastructure, all to power AI.

Next, there are firms likely to be involved in reshoring, such as those in industrial automation and those developing integrated circuits. Reshoring may have begun with companies looking to avoid the supply-chain snarls seen during the pandemic, but this trend could accelerate now given the current U.S. administration’s desire to revive American manufacturing.

This spike in capex should be good news for U.S. growth because the companies growing their budgets the most are all expected to have double-digit returns on invested capital (ROIC), according to consensus forecasts from Factset. And as long as ROIC exceeds a company’s cost of capital, you’ve got the seeds for continued growth.

Of course, if we do end up in a world where tariffs are higher, say, than the widely expected 10% mark, such as those on microchips and steel, then the economics get more complicated for the big spenders. Costs would almost certainly be higher, potentially causing capex to recede, which should eventually compound the potential slower growth that may accompany higher tariffs.

That said, if tariffs do come in higher than tolerable, slower growth could dampen inflation, bringing interest rates down. Capex could, in turn, rise along with increased borrowing, as companies fund the projects with the most promise, amplifying the potential growth benefits.

So despite all the noise about rising risks to U.S. corporate earnings growth and the economy at large, the push to increase capex in recent years suggests there is room for some optimism.

(The opinions expressed here are those of the author, Stephanie Guild, CFA, Chief Investment Officer of Robinhood Markets. The views are her own.)

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