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A Post-Pandemic Investment Boom?

Executive Summary

  • Increased S&P 500 earnings expectations likely to help drive higher capex

  • Portfolio managers prefer firms invest for the future

  • Easy access to capital and recent underinvestment should set the stage for capex growth

  • Cyclical sectors and EM are seen as beneficiaries

Capex Comeback

It’s mid-year and earnings season is on tap. 2Q21 is expected to have been yet another booming quarter for the corporate world—particularly for S&P 500 firms. With PMIs around the world significantly on the mend from the 2020 lows, cash flow is up markedly which brings about important decisions for those in the C-Suite. Namely, what do to with the cash?

Corporate CFOs Must Consider their “CFO”

In general, cash flow from operations (CFO) is often used to pay wages (it’s hard to get around that for very long), reward shareholders (via dividends and buybacks), and invest in long-term projects (capital expenditures).

So where’s the money going to go?

While increased buybacks and dividends along with higher wages are likely, we expect a sharp uptick in capex spending.

Capex > Shareholder Accreditive Activities-BofA Survey

The latest BofA Fund Manager Survey found there is growing interest among portfolio managers for companies to invest aggressively for future projects. The June survey revealed 52% of respondents want firms to do more capex, up 1% from the prior month.

With bazookas coming left and right from fiscal stimulus measures, firms have more flexibility now than a year ago. Fund managers are no longer worried about the balance sheet quality of big companies, according to the survey.

Chart of the Week

That brings us to the chart of the week featured in the “Quarterly Strategy Pack—Q3 2021”. In the report, we list seven Core Views that determine our Macro, Market, and Asset Allocation Outlooks. One such Core View is how the second wave of the recovery pans out. We expect the consumer to turn from careful to cheerful while corporate capex increases.

Corporate Capex Comeback

A picture tells the best story. When the S&P 500 forward 12-month earnings forecast is advanced one year, we see alignment between earnings expectations and capex growth (ex-commodities). Capex is set to surge after the biggest annual declines since the GFC.

Year Two Trends

Many investors are wondering what the next leg of the recovery might look like. We are in year two, and this can be a rocky period for equity markets if history is any guide, but economically, this is a time when S&P 500 corporate managers start noticing cash building in their coffers.

Lending Standards Are Easy

Not only is cash flow from operations on the rise, but financing conditions remain easy. Lending standards are much lower versus a year ago, making debt financing an easy option too. Firms can borrow on the cheap and invest in (hopefully) high ROI projects.

Supply Chains

Another thing to consider--backlogs and cycle lags are likely to create an unusually prolonged period of underinvestment across multiple industries. Indeed, a big part of the surge in commodities and worsening backlogs/shortages/delays is due to stagnant corporate capex across multiple industries the past few years.

It’s Infrastructure Week. Again.

Finally, let’s not forget about the apparent willingness of the US government to boost infrastructure spending.

Our view

The conditions are ripe for capex to takeoff in the second half of 2021 and into 2022. We are selectively overweight risk assets, particularly those with exposure to cyclical sectors and emerging markets.


The global economy is more than a year into its recovery and on pace to post its biggest single-year GDP increase since 1973.

For the S&P 500, there is a clear connection between expected earnings growth and corporate capex. We anticipate the next stage of the recovery to be driven by easy financing conditions, cycle lags, and a long stretch of general underinvestment. Fiscal initiatives to improve infrastructure is another boon to consider. So rising capex and infrastructure investment could combine into a generalized investment boom.

Be on the lookout for significant capex plans among S&P 500 firms in the upcoming earnings season...

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