Stocks To Pick As Business Spending Rises

Our theme of Capex Cycle Stocks – which includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players – has declined by about 11% year-to-date in 2022, compared to the S&P 500 which is down about 9% over the same period. While the recent pullback is driven by a broader sell-off in equities, given the rising interest rate environment and the ongoing Russia-Ukraine war, there are a couple of trends that could help the theme in the medium term.

With the global economic recovery likely to continue over 2022 with demand for goods and services remaining strong, companies are expected to prioritize improving capacity and easing the many supply chain bottlenecks that were increasingly obvious through the Covid-19 reopening. Corporates have also been posting solid profits over the last year, bolstering their cash holdings and this could also drive up investments. Moreover, companies could also invest more into automation solutions to mitigate the impacts of a tight labor market and soaring wages. For perspective, U.S. jobless claims have declined to the lowest levels seen since 1970, with the U.S. employment-cost index, a measure of the wages and benefits paid by employers, rising by about 4% year-over-year in Q4 2021. Data from S&P Global Ratings indicates that capital expenditures by large companies globally are expected to rise about 6% year-over-year in 2022.  Separately, the passage of the U.S. infrastructure bill last year, which earmarks about $550 billion toward new infrastructure spending should also drive demand for the companies in our theme.

Within our theme, Lam Research stock, a supplier of wafer fabrication equipment and related services to the semiconductor industry, has been the weakest performer, with its stock down by about 23% year-to-date. On the other side, Deere stock, a company that manufacturers machinery used in agricultural, construction, and forestry, has been the strongest performer, rising by about 3% year-to-date.

Here you’ll find our previous coverage of the Capex cycle stocks theme, where you can track our view over time.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

[1] Month-to-date and year-to-date as of 3/1/2022
[2] Cumulative total returns since the end of 2016