What Does Reduced Capex Investment by Companies Mean for Stocks?

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Companies are exercising caution as they prepare for a turn in the economic environment—meaning that their capex investments may be slowing, a sign of a possible economic downturn. Recent reports suggest that capex, or capital expenditure, for companies listed on the S&P 1500 index is slated to raise only 7% in 2021, compared to a 21% increase from the year before.

Leaders in areas that are highly dependent on economic trends like retail and restaurants–both part of the consumer discretionary sector–are expected to have a 3% capex decrease, whereas the industrial sector, another capex-dependent area, is expected to increase only 7% this year and then only 2% next year. It has been reported that major corporations are carefully preparing for potential cash shortages by paring back their capex investments in order to generate more cash flows to keep their companies afloat.

The Federal Reserve’s increase in interest rates has also played a part in making companies cautious with regards to their capex investments, with banks tightening lending environments in order to curb demand. Revenue growth for the S&P 1500 is estimated to drop to a meager 2.9%, below the nine-year average of 5.1%, as capex spending remains steadied while businesses look to mitigate the impact of any potential economic problems within the market.

The fact that companies are reducing their capex investment could be seen as good news for their shareholders, as the leftover funds are likely to be used for dividends, share repurchases, and other shareholder-friendly initiatives. Cash returns for shareholders of the S&P 500 are expected to increase to more than $800 billion, suggesting that corporate America is actively looking to reward their investors and reduce risk in the process.

Citi strategist Scott Chronert suggests that decreased capex reinforces the concern of stagnant earnings growth for businesses, a possible result of the economic slowdown. Despite this, it seems as though stock investors have already started to recognize and anticipate these challenges, as the S&P 1500 index is still down roughly 14% from the end of 2021.

Though the current capex climate looks uncertain and businesses are being cautious with the way they invest, investors can still remain confident that they will benefit from the leftover cash businesses don’t spend on capex investments. As businesses prioritize cash returns to protect shareholders, investors should focus on finding new ways to beat the market and come out on top.