Emerging Capex Cycle Set to Propel SMID Stocks for Growth
Emerging Capex Cycle Set to Propel SMID Stocks for Growth
According to analysts from Bank of America, a significant capital expenditure (capex) cycle is on the horizon, particularly promising for small- and mid-cap (SMID) stocks, as well as various other industries.
The Forces Behind the Capex Cycle
This revitalized capex cycle is propelled by diverse factors including reshoring efforts, urgent U.S. infrastructure needs, and rising global geopolitical tensions. Each of these elements contributes to an increase in spending dedicated to manufacturing, infrastructure, and technology, as indicated by Bank of America.
Reshoring Trends and Their Impact
Reshoring, a trend that has gained momentum in previous years, has experienced an acceleration due to the pandemic and geopolitical strains across different regions. Bank of America notes that companies increasingly prioritize securing intellectual property and minimizing supply chain vulnerabilities. This urgency has sparked a notable surge in manufacturing investments within the United States.
Manufacturing Investments and the Infrastructure Crisis
The bank reports that the U.S. has witnessed an extraordinary increase in manufacturing expenditures, representing the largest leap in more than a decade, bolstered by a push for AI-related developments. Furthermore, the aging infrastructure in the U.S. is another significant driver of the capex cycle. Following years of insufficient investment, many non-residential assets and structures have aged to a critical state, some now standing as the oldest they have in seventy years. Presently, the American Society of Civil Engineers assigns a grade of C- to U.S. infrastructure, underscoring the pressing need for improvements.
In conjunction with a rise in miles driven since 2010, there is an escalating urgency to innovate and enhance roads, bridges, and utilities across the nation.
Changing Financial Landscape and Investment Shifts
As real interest rates begin to rise, the financial environment is exhibiting significant transformation. Long-term growth projects that previously thrived under zero interest rate policies have become increasingly dependent on achieving higher returns. Bank of America highlights that this shift has drawn considerable private equity investments toward physical infrastructure, with funding allocations outpacing those dedicated to technology by six-fold.
Opportunities for SMID Caps Amidst the Growth
Given these developments, small- and mid-cap stocks are poised to reap the rewards as their sales growth increasingly correlates with this surge in capex, particularly in the “picks and shovels” domain. Sectors such as utilities, industrials, and real estate appear particularly ripe for capitalizing on these opportunities.
Frequently Asked Questions
What is driving the current capex cycle?
The current capex cycle is largely driven by reshoring efforts, infrastructure needs, and global geopolitical tensions, leading to increased spending on various sectors.
How does reshoring affect manufacturing investments?
Reshoring is positively impacting manufacturing investments as companies seek to reduce supply chain risks and protect intellectual property, leading to heightened domestic investments.
What is the state of U.S. infrastructure?
U.S. infrastructure is significantly aged, receiving a C- grade from the American Society of Civil Engineers, indicating a pressing need for modernization.
How have interest rates impacted investment trends?
As real interest rates rise, investment trends are shifting towards higher return projects, with a notable increase in private equity flowing into physical infrastructure.
Why are SMID caps expected to benefit from these trends?
SMID caps are positioned to benefit due to their sales growth being closely linked to increases in capital expenditures, especially within utilities, industrials, and real estate sectors.
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