Capital spending is accelerating while several tailwinds are only just starting to kick in. Capital expenditures (capex) are being supported by several factors, including booming earnings, corporate tax cuts, immediate expensing of capital investments, repatriation of overseas cash, strong business confidence and deregulation.
We think the industrials sector is well positioned to benefit from this trend. “The biggest potential beneficiary of the healthy manufacturing environment, the industrials sector, has lagged the broader market year to date,” notes LPL Research Chief Investment Strategist John Lynch. “But we think the sector has an opportunity to play catch-up.” As shown in today’s LPL Chart of the Day, the strong manufacturing environment has been met with underperformance by the sector most leveraged to it and to capex.
We do not expect the strong manufacturing environment and capex pickup to be short-lived. According to the latest semi-annual Institute for Supply Management (ISM) survey, manufacturers plan to increase capex by 10% this year. The impact of the new tax laws is just kicking in. Nearly $300 billion was repatriated from overseas in the first quarter with more to come. Companies can now fully expense capital equipment. Booming profits give companies spending power at a time when their leaders are confident. Finally, oil’s rebound is supporting a recovery in energy investment.
Trade policy remains a big risk for the sector, but we believe the underlying fundamentals are strong enough to justify a positive view. We believe the technology sector is also well positioned to benefit from the pickup in capex, as we discuss in our latest Weekly Market Commentary, due out later today.
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The Standard & Poor’s 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Institute for Supply Management (ISM) index is based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders, and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.
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