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In One Chart: ‘Signs of a new capex cycle’ emerge as S&P 500 companies report earnings, says BofA

Companies in the S&P 500 index may be entering a new spending cycle as they face supply-chain constraints during the pandemic, with signs of capital expenditure picking up as they continue to report results for the third quarter, according to BofA Global Research.

“We see signs of a new capex cycle ahead,” BofA analysts said in their earnings tracker report dated Oct. 31. That’s based on around 40% of S&P 500 companies reporting capex so far.

Mentions of supply chains have soared during earnings calls for the third quarter amid concerns over bottlenecks and related inflationary pressures, according to the report. Meanwhile, the 2-year growth rate for capex has turned positive for the first time since COVID-19, the BofA analysts found, as companies seek to adjust to supply challenges.

BofA Global Research report dated Oct. 31, 2021

“With lingering bottlenecks in the economy, we expect companies to increase capex to boost efficiency, particularly on automation,” the BofA analysts said in the note. “The capex pickup is bullish for small-caps, one of our preferred current themes within U.S. equities.”

The Russell 2000
RUT,
+2.65%
,
a U.S. equities index tracking small-cap companies, rose 2.7% on Monday to finish just shy of a record. The gauge has climbed more than 19% this year. 

Read:Are supply-chain disruptions ‘transitory’? Odds are low so here’s where to invest, says an analyst

The S&P 500
SPX,
+0.18%
,
meanwhile, edged up 0.2% to log a record finish, resulting in year-to-date gains of 22.8% for the U.S. large cap index, FactSet data show.

Capex has increased 23% year-over year for S&P 500 companies based on third quarter results so far, according to BofA. That surpasses the 17% growth seen during the second quarter on a year-over-year basis.

A new capex cycle may be emerging following a surge in corporate spending on software and information processing equipment that Oxford Economics cited in a report in September. The firm explained at the time that companies were focused on technology-related investments to support remote work during the pandemic.

See: Corporate profit boom is driving spending in this key area, not office buildings

With third-quarter earnings now under way, S&P 500 companies are showing a 15% increase in capex on a 2-year growth basis, according to the BofA report. That growth rate drops to 3% when excluding e-commerce giant Amazon.com
AMZN,
-1.61%
,
the analysts said.  

Labor and supply-chain challenges are costing Amazon billions of dollars in the pandemic, with the company still looking to add workers to meet demand, MarketWatch has reported. Amazon’s stock dropped after a third-quarter earnings miss and was down 1.8% in Monday afternoon trading, according to FactSet data.

See: Amazon hired 628,000 people but is still short staffed

Still, a majority of S&P 500 companies have beat earnings estimates for the third quarter, the BofA report shows. Earnings, led by energy
XLE,
+1.72%

and financials
XLF,
+0.05%
,
continue to “surprise to the upside, beating consensus by 7%,” the analysts said.

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