For some analysts, the tax reform isn’t the only driver behind a projected increase in buybacks. Capital expenditures lag behind growth in the equity index by about six months, according to Dennis DeBusschere, head of portfolio strategy at Evercore ISI. Under this theory the 20 percent gain in the S&P 500 this year will itself unleash investing in 2018.
“Better normal market growth over the course of the second half of 2017 suggests stronger capex in 2018,” he said in a research note last week. Even though capex has been slowly edging higher, its rate of growth is still below the long-term median of 6.3 percent, he said.
Investors have evinced a preference for high-capex stocks. Shares of companies with the most capital spending relative to market value are up 34 percent so far this year, compared with a 22 percent return for those that spend the most on repurchases and dividends, data compiled by Goldman Sachs Group Inc. and Bloomberg show.
“We are on the verge of a huge tax overhaul, and the chances are high that we could finally see a pick-up in the S&P companies increasing their capital spending,” said Tim Ghriskey, managing director at Solaris Asset Management. “The outlook is rather bright.”
This article was provided by Bloomberg News.