How Is The Capital Spending Theme Faring?

AMAT: Applied Materials logo
Applied Materials

Our theme of Capex Cycle Stocks – which includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players – has gained about 5% year-to-date, compared to the S&P 500 which remains up by  4% over the same period. Capital spending by U.S. companies remained very strong over 2022, driven by low-interest rates, a focus on boosting capacity, and moving production back to the U.S. following the supply chain snarls of the Covid-19 re-opening. Automation and productivity improvements have also been a key theme for manufacturers, given surging labor costs. Overall, companies within the S&P 500 are estimated to have grown their capital expenditures by 19.8% in 2022. [1]

However, capital spending is likely to slow down this year. Although fears of a U.S. recession have eased a bit, given cooling inflation, and a strong labor market, high interest rates could remain a downer. Following the Fed’s big rate hikes over the past year, the effective federal funds rate stands at almost 4.6%  presently and this could be poised to rise further, given the Fed’s continued hawkish stance. This could make it less viable for companies to finance new projects. Large companies have been paring back on their capital spending plans. For example, FedEx recently cut its 2023 capital budget by roughly 6%, citing signs of slowing demand growth for shipments, while major semiconductor players such as Micron and TSMC have also been reducing capital spending plans on account of weaker consumer spending on personal computers and consumer electronics following the easing of Covid-19.

Within our theme, Applied Materials (NASDAQ:AMAT) has been the strongest performer with its stock up by about 20%  year-to-date. The company provides fabrication equipment and related services to the semiconductor sector. On the other side, Honeywell International (NYSE:HON), an industrial company that focuses on aerospace, building technologies, performance materials, and safety and productivity solutions, has been the weakest performer with its stock down by about 10% thus far in 2023.

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What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

 Returns Mar 2023
MTD [1]
YTD [1]
Total [2]
 AMAT Return 1% 20% 263%
 S&P 500 Return -1% 3% 76%
 Trefis Multi-Strategy Portfolio 0% 7% 237%

[1] Month-to-date and year-to-date as of 3/2/2023
[2] Cumulative total returns since the end of 2016

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  1. Globalxetfs []