According to Bank of America analysts, a significant capex cycle is emerging, which is set to benefit small- and mid-cap (SMID) stocks, along with several other sectors.
This “old-school capex cycle” is driven by a mix of factors such as reshoring efforts, U.S. infrastructure needs, and global geopolitical risks, all of which are fueling an increase in spending on manufacturing, infrastructure, and technology, says the bank.
BofA highlights that reshoring has been a rising theme for years, accelerating due to the COVID-19 pandemic and geopolitical tensions.
They explain that the need for companies to secure intellectual property and reduce supply chain risks has prompted a surge in U.S. manufacturing investments.
According to BofA, “we have seen a surge in U.S. manufacturing spend, the biggest jump in more than a decade,” with the added push coming from AI-related investments.
The aging U.S. infrastructure is another key factor driving the capex cycle, says the bank.
After decades of underinvestment, non-residential assets and structures are the oldest they have been in 70 years, and BofA cites that U.S. infrastructure is currently graded a C- by the American Society of Civil Engineers.
This, combined with rising miles driven since 2010, is said to add urgency to modernize roads, bridges, and utilities.
As real interest rates have risen, BofA notes that the financial landscape has shifted. Long-term growth projects that were once supported by zero interest rate policies (ZIRP) are now seen as more reliant on higher returns.
This is said to have attracted significant private equity dollars into physical infrastructure, outpacing investments in tech by six times.
SMID caps are expected to benefit, as their sales growth is closely tied to this increase in “picks and shovels” capex, along with sectors like utilities, industrials, and real estate.
