What’s The Outlook Like For The Capital Spending Theme In 2023?

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LAM Research

Our theme of Capex Cycle Stocks – which includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players –  declined by about 12% over 2022, outperforming the S&P 500 which was down by about 17%. Capital spending largely held up over the last year, despite rising interest rates and surging inflation. For example, according to S&P Dow Jones Indices, capital spending among companies in the S&P 500 was on track to grow by about 20% over Q3 2022, in line with growth rates seen over Q1 and Q2. There are multiple trends driving the growth in capital spending including a focus on boosting capacity and moving production back to the U.S. following the supply chain snarls of Covid-19 re-opening. Automation has also been a key theme for manufacturers, given surging labor costs. The $1 trillion U.S. infrastructure package, which was signed into law about a year ago, has also been driving demand for heavy machinery and tools.

That being said, multiple economic indicators point to a recession in the U.S. The yield curve – seen as a very reliable indicator of a coming recession – remains inverted.  The U.S. Fed continues with its hawkish stance despite cooling inflation, with more interest rate hikes due through 2023. U.S. manufacturing is also cooling off. S&P Global’s purchasing managers index (PMI) has declined to the lowest levels seen since June 2020 at a seasonally adjusted 46.2 in December 2022 and down from 57.7  in December 2021. It’s possible that a weakening economy and higher interest rates could force companies to prioritize reducing their debt loads in the near term rather than boosting capital investments.

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Within our theme,  Lam Research (NASDAQ:LRCX) has been the weakest performer with its stock down by about 30% over the last 12 months. The company provides fabrication equipment and related services to the semiconductor sector. On the other side, Deere & Company (NYSE:DE), which manufactures agricultural machinery, heavy equipment, forestry machinery, and diesel engines, has been the strongest performer rising by about 15% over the past year. 

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 Jan 2023
MTD [1]
2023
YTD [1]
2017-23
Total [2]
 LRCX Return 9% 9% 334%
 S&P 500 Return 2% 2% 75%
 Trefis Multi-Strategy Portfolio 5% 5% 229%

[1] Month-to-date and year-to-date as of 1/11/2023
[2] Cumulative total returns since the end of 2016

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