Companies Are Investing Less in Capex, leading to more guarded spending. This means slowing growth in sales and profits, and a corresponding adjustment in the stock market. Companies are holding onto cash and reducing their capital expenditures in response to higher interest rates and uncertain economic conditions. This is seen in a reduction of 7% in the aggregate capex for companies on the S&P 1500 index to just over $1 trillion this year, down from about 21% in 2020. Moreover, consumer discretionary and industrial investment is projected to decline roughly 3% and 7% respectively in 2022.
Such caution affects those companies that supply the heavy equipment or technologies and systems used in capital expenditures. Analysts of the S&P 1500 industrials index forecast a decrease in sales growth from almost 30% in 2021 to just 3.7% in the next two years. On the positive side, less capex will enable companies to return more cash to shareholders; S&P 1500 free cash flow is expected to gain 9% this year due to decreased capex.
The stock market has thus far been able to absorb the disruptions, with the S&P 1500 index still down only 14% from its late 2021 record high. Careful investors may expect muted demand and top-line performance but should not be deterred from taking advantage of potential opportunities from historically low stock prices and higher cash returns.
Scott Chronert, a strategist for Citigroup, underscored that the decreasing capex “reinforces stagnating earnings growth concerns.” Chronert’s words serve as a reminder of the economic reality and a reminder to keep an eye out for any changes in the market.
There is still cause to be optimistic; while capex spending may not reach the levels of 2021, the lowered capex expenditures could open up opportunities for stock investors and be a source of increased cash returns. Careful consideration and the ability to spot compelling stocks could benefit those investors who find those stocks worth investing.