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 15% year-to-date in 2022, underperforming the broader markets. While the theme had a solid 2021, rising by 35%, the theme faces multiple crosswinds at the moment. Corporate profit growth, which remained robust through 2021, could be poised to cool off, due to the impacts of surging energy and commodity prices and a tight labor market, and this is seen as a threat to investment plans. There are also concerns about the state of the U.S. economy, after Q1 GDP posted a surprise decline, falling by about 1.5%, prompting fears of a recession, which could hurt growth in the capital equipment space. The U.S. Federal Reserve is also taking an aggressive monetary policy stance as it looks to cool demand and manage inflation.
That being said, there are a couple of factors that could drive the capex stocks in the medium term. Companies are looking to ease the many supply chain bottlenecks that were increasingly visible through the Covid-19 reopening, investing in optimizing or bolstering their capacity. Companies are also likely to continue to invest in greater automation 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 1969, making it difficult for companies to hire and retain workers. The $1 trillion U.S. infrastructure package, which was signed into law about six months ago, is also expected to help companies providing heavy machinery and tools. Earlier this month the government indicated that there were a total of 4,300 projects underway with over $110 billion in funding announced.
Within our theme, Rockwell Automation has been the weakest performer, with its stock down by about 36% year-to-date. The company, which is in the industrial automation business, sells software, electromechanical equipment, and services that help businesses boost productivity and efficiency. On the other side, Caterpillar stock, a company that manufacturers machinery used in agricultural, construction, and forestry, has been the strongest performer, rising by about 8% year-to-date.
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