SMID Caps Positioned to Gain from Capex Cycle: BofA

According to analysts at Bank of America, a substantial capital expenditure cycle is emerging, poised to benefit small- and mid-cap (SMID) stocks and various other sectors.

This “traditional capex cycle” is being driven by a combination of factors, such as efforts to bring production back to the U.S., urgent infrastructure needs, and global geopolitical uncertainties. These elements are contributing to a rise in spending on manufacturing, infrastructure, and technology.

BofA emphasizes that reshoring has been an ongoing trend for several years, gaining momentum due to the COVID-19 pandemic and increasing geopolitical tensions. The necessity for companies to protect intellectual property and mitigate supply chain risks is leading to a marked increase in investments in U.S. manufacturing.

The bank notes that there has been a significant uptick in U.S. manufacturing spending, representing the largest increase in over a decade, further propelled by investments related to artificial intelligence.

Aging U.S. infrastructure is another critical driver of this capex cycle. After years of underfunding, non-residential assets and structures have reached their oldest condition in 70 years, with the American Society of Civil Engineers currently grading U.S. infrastructure at a C-. This situation, coupled with rising vehicle usage since 2010, heightens the urgency to modernize roads, bridges, and utilities.

As real interest rates have climbed, the financial landscape has evolved. Projects that were previously supported by zero interest rate policies are now perceived as needing to offer higher returns. This shift has attracted a significant influx of private equity into physical infrastructure, with investments in this area outpacing technology spending by six times.

SMID caps are projected to gain from this trend, as their sales growth aligns closely with the increased spending in sectors such as utilities, industrials, and real estate, which are benefiting from this surge in capital expenditure.