The capital investment is meh.

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Good day. In case you haven’t been following the news, there is an election today. And it seems that investors have finally accepted that the two candidates are neck and neck. The dollar and the 10-year Treasury fell yesterday as investors began unwinding their “Trump trades.” Let’s hold hands and jump together into the abyss of uncertainty. Send us an email: robert.armstrong@ft.com and Aiden.reiter@ft.com.

Capital investment

There is a broad consensus on Wall Street, shared by many academic economists, that investment will increase in the medium and long term, globally and in the United States. The world needs a new green electricity grid; the AI ​​revolution requires massive infrastructure; Governments are enthusiastic about industrial policy. This means greater investment, higher rates and greater growth.

At the same time, there is a view that corporations in the United States underinvest and spend their cash on stock buybacks or acquisitions designed to reduce competition, rather than investing in investments that increase productivity.

The two opinions are not directly opposite. We must distinguish between public and private investment. Within private investment the panorama varies depending on the sector. No one accuses the Magnificent Seven tech stocks of underinvesting, for example; on the contrary (see below). But the situation deserves a little attention. Are American companies investing more?

Below is capital investment, by category, as a share of GDP over the past 50 years or so. Investment in buildings has remained stable relative to the size of the economy for 30 years. Spending on equipment has been falling in fits and starts. Spending on software and intangibles has grown steadily. Putting all three together, capital expenditure remains stable at around 12-14 percent of GDP in the long term.

It is quite likely that the increase in equipment investment will come down to hardware for AI data centers. Some evidence of this comes from the capital spending of S&P 500 companies. S&P capital spending increased between 2021 and 2023, but remained stable in the last 12 months, except for the Magnificent Seven, which are advancing with investment in AI:

The general picture is quite clear. Corporate investment is not growing as a proportion of GDP. The only type of investment that has accelerated recently has been equipment, and that appears to be an effect of AI. The same pattern is evident in large companies: investment is stagnant this year, except for Big Tech’s AI budgets.

The Mag 7: high expectations, meets a great investment

Last week, Meta beat Wall Street earnings expectations by a comfortable margin. But its shares fell and have been trading poorly ever since. The culprit was AI-related capital expenditures.

Capital expenditures in the quarter totaled more than $9.2 billion, and according to CEO Mark Zuckerberg, the company “continue[s] “expect significant capex growth in 2025.” Zuckerberg acknowledged that news about increased infrastructure investment “they may not be what investors want to hear in the short term”. But executives were vague about how and when all capital expenditures would be transformed into revenue.

Meta feels a pressure that other members of the Magnificent Seven may soon experience. Stocks are expensive and investors expect surprising levels of revenue and profit growth each quarter. At the same time, the investment requirements to stay in the AI ​​game are enormous and the spending still doesn’t generate much revenue or profit. Unless AI products start generating revenue soon, this dilemma will only become more acute.

Microsoft and Apple also beat earnings expectations last week and also saw their shares fall. Microsoft CEO Satya Nadella said the company expected capital spending, which was already double what it was last year, to increase going forward. He attributed Azure’s revenue growth to AI capabilities. But investors seemed unsure. According to Mizuho’s Gregg Moskowitz, “most of Azure’s growth in the first quarter was due to higher-than-expected revenue recognition during the period,” and Azure’s future guidance was below expectations. Apple, whose AI spending is small by comparison but growing, gave cautious future guidance, as the use case for its Apple Intelligence AI system remains unclear.

Microsoft, Amazon and Google sell computing power to other companies that want to run artificial intelligence applications. Nvidia sells AI chips to everyone involved. But “selling shovels during the gold rush” pushes the revenue problem away rather than solving it. Someone has to pay to use AI if the AI ​​economy is going to continue to grow and AI stocks are going to continue to rise. With the market on the rise, those who are confident that AI will be a source of income must worry about when the rotation will begin.

(Reiter)

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