America’s largest companies continue to increase spending on capital projects, an encouraging signal for investors in an uncertain economic climate.
are among those who have increased their spending on big-ticket items, such as real estate, equipment or technology, to fuel growth. The investments are typically aimed at expanding the companies’ fast-growing operations or even optimizing their inventory amid a tough business environment, executives said.
Capital spending by S&P 500 companies grew at a faster rate than share buybacks for the first time since the first quarter of 2021, according to data analyzed by S&P Dow Jones Indices from the second quarter earnings season .
Based on the results of about two-thirds of the companies in the index, capital spending rose 20% from a year earlier to $149.8 billion, roughly in line with the rate growth in the first quarter. Meanwhile, share buybacks climbed 10% to $160.8 billion and dividends rose 14% to $140.6 billion.
The spending boom offered support for a stock market that has been rocked by worries about soaring inflation and the pace of the Federal Reserve’s campaign to raise interest rates. The S&P 500 has fallen 13% this year, but rebounded 13% from its mid-June low.
“One of the reasons stocks haven’t absolutely fallen off a cliff right now is because of this increase in capital spending,” said Ben Silverman, director of research at VerityData. “The executive suite reports that they are comfortable spending money instead of hoarding money. »
The latest round of corporate earnings reports have offered conflicting views on the economy’s trajectory and whether a recession is on the horizon. Inflationary pressures have driven up the costs of everything from food to fuel and raw materials, weighing on corporate profits and weakening consumer purchasing power.
Investors continue to analyze mixed data on the health of the economy. Gross domestic product has contracted for two consecutive quarters, a common definition of a recession. Still, job gains remain strong, and the unemployment rate is holding steady. Investors await the latest labor market readings with the July jobs report due Friday.
Meanwhile, Wall Street sentiment hit its lowest level in more than five years in July, according to the latest reading from Bank of America’s sell-side strategists released this week. Extreme bearish sentiment is often a mixed signal for a potential rally, bank analysts said.
Companies in the information technology, communications and industrial services sectors were the biggest contributors to capital spending growth, according to analysis by Bank of America.
Alphabet, for its part, announced last week that its capital expenditures for the second quarter reached $6.8 billion, compared to $5.5 billion a year earlier. The company said it was spending on technical infrastructure, especially servers.
“With an uncertain global economic outlook, our strategy of investing in deep technology and computing to create useful long-term products is the right one,” the CEO said.
during the company’s earnings call.
Similarly, GM capital expenditures climbed to $2.1 billion in the second quarter from $1.5 billion in the same period a year earlier. Chief Financial Officer
during GM’s earnings conference call, highlighted the automaker’s efforts to expand its fleet of electric vehicles. “The investments we’ve made in these vehicles over the past two years…provide a solid bridge to our all-electric future,” he said.
Chief Financial Officer of PepsiCo
highlighted digital investments to ensure stores are stocked with appropriate inventory as the beverage and snack company reported $1.5 billion in ending capital in the 24 weeks to mid-June , up from $1.3 billion in this period a year earlier.
“If we have an earnings streak here where capital spending continues to be quite strong and companies are willing to spend that capital, that means they are giving a fairly optimistic outlook for their business,” said Victoria Fernandez. , Chief Market Strategist and Portfolio Manager at Crossmark Global Investments.
Some of the growth in capital spending can be attributed to a reboot of typical behavior after companies opted to hoard cash during the height of the Covid-19 pandemic.
S&P 500 companies held about $1.667 trillion in cash and cash equivalents on their balance sheets at the end of the first quarter, up from $1.797 trillion at the end of 2021, according to the S&P Dow Jones indices. This figure excludes the finance, real estate, utilities and transportation sectors, as these companies normally maintain high cash reserves.
Other companies are spending to bring production to the United States to stem ongoing supply chain challenges that have led to shipping delays and shortages of key products such as semiconductors. Mentions of “relocating” on earnings conference calls have skyrocketed in 2022, according to Bank of America.
“It will be a longer-term theme that reflects the reality that there is a compelling opportunity to…make and build in America,” said Rajesh Nakadi, chief investment officer at BNY Mellon Wealth Management Global Family Office.
Some companies are tightening their belts as they prepare for a potential recession.
, for example, last week cut its capital expenditure forecast; for the year. The chipmaker announced a surprise quarterly loss and its biggest revenue decline in more than a decade, blaming a drop in personal computer purchases and product delays.
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Workforce challenges have triggered a surge in investment in automation technology, investors and analysts say.
Companies are still keeping plenty of cash on the sidelines, signaling some restraint in capital spending, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
“Is this a record? Mr. Silverblatt asked about capital expenditures. “No, but these are good numbers. It is certainly a rising quarter despite the concerns. »
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