US Corporate Capex Comeback

• Corporate capex growth crashed in 2020 for understandable reasons.

• Commodity capex in particular contracted at a record pace and now its weighting of total S&P500 capex is tracking at record lows.

• That stands in contrast to record highs in tech sector capex.

• Looking forward we should expect capex growth to surge based on the leading indicators and the macro/thematic backdrop.

• At the margin this should help the recovery, while the trends in tech vs commodity capex may yield clues on the market outlook.

In the latest Weekly S&P500 ChartStorm write-up I added in a chart outlining the trends in capex (Capital Expenditure) growth by S&P500 listed companies. In this blog I wanted to expand a little on that chart and bring in a couple of other interesting charts which help illuminate the macro/market outlook.

It’s worth keeping an eye on capex trends for a few reasons. Clearly it can provide insights on macro trends, but as we will see, it can also offer some interesting clues on the market outlook.

1. Capex Collapse: First up is the chart I mentioned at the start. It shows annual growth of capital expenditure by S&P500 listed companies. As you might guess given all that’s gone on, capex growth collapsed as a result of disruption/uncertainty from the pandemic, the initial credit crunch and spike in funding costs, and lingering questions on the demand outlook. But things are starting to turn the corner.

2. Capex Growth by Sector: Interestingly, it’s worth highlighting how tech sector capex surged in 2018 as part of the big cash repatriation (Trump Tax package in 2017). Headed into 2019 obviously it was a high bar to beat so capex growth begun to taper off for the Tech sector. But also of note is how commodity capex began to rebound following a large period of contraction as a result of the secular bear market in commodities. This commodity capex crunch got extended last year as commodities initially crashed during the pandemic panic, and the lingering uncertainty and disruption prevented commodity capex from rebounding.

3. Commodity Capex vs Tech Capex: As such, commodity capex as a proportion of all S&P500 capex has plunged to record lows… and tech capex has reached new all time highs. This chart is fascinating by itself, but also in so far as it sort of echoes the dot-com period: i.e. the same period that preceded a major bull market in commodities and a major peak in tech stocks.

4. Funding and the Capex Growth Outlook: As implied in the first chart, the path of S&P500 forward earnings growth suggests a roaring rebound in capex (n.b. capex growth tends to lag earnings growth since capex decisions and implementation by their nature tend to be a bit laggy). But also of note is the path of US commercial bank lending standards: understandably US banks tightened up standards as the pandemic panic hit - there was too much uncertainty and clear question marks around credit quality.

Subsequently as we got more of a light at the end of the tunnel and substantial fiscal backstops and monetary + credit market easing, banks have since started to relax a little bit (emphasis on a little bit). This along with the improvement in the overall funding picture, prospects of reopening, and supply chain disruption should combine as a powerful set of tailwinds to corporate capex growth.

Final Thoughts: The charts point to a rebound in corporate capex growth after one of the most severe downturns. Aside from the leading indicators, the macro thematic backdrop adds confirmation e.g. reopening, overstimulation, supply chain disruption and reshoring, rising prices, and a better funding environment.

Intuitively, stronger capex growth will help the growth outlook at the margin. It may also offer an offset to some of the intensifying inflation pressures - but I would say that’s likely a theme for next year given the lags.

In terms of markets, the collapse in commodity capex helps sow the seeds for a sustained bull market in commodity prices. Also, while it may be different this time, one can’t help but notice how the record *high* capex by tech companies seems to echo the same pattern seen during the peak of the dot com bubble. So we could in some ways call this points scored for value vs growth… but that’s a topic for a different conversation (or a future blog post!).