SMID Caps Poised to Benefit from Capex Cycle: BofA By Investing.com

According to analysts at Bank of America, a significant investment cycle is shaping up that will benefit small- and mid-cap stocks (SMIDs) along with several other sectors.

This “old-school capex cycle” is being driven by a combination of factors such as relocation efforts, US infrastructure needs and global geopolitical risks, all of which are fueling increased spending on manufacturing, infrastructure and technology, the bank says .

BofA points out that relocation has been a rising theme for years, accelerating due to the COVID-19 pandemic and geopolitical tensions.

They explain that companies’ need to secure intellectual property and reduce supply chain risks has driven an increase in investment in US manufacturing.

According to BofA, “we saw an increase in US manufacturing spending, the largest jump in more than a decade,” with additional impetus coming from AI-related investments.

Aging US infrastructure is another key factor driving the investment cycle, the bank says.

After decades of underinvestment, non-residential assets and structures are at their oldest in 70 years, and BofA notes that US infrastructure is currently rated C- by the American Society of Civil Engineers.

That, combined with increased mileage since 2010, is said to add urgency to road, bridge and utility upgrades.

As real interest rates have risen, BofA notes that the financial landscape has changed. Long-term growth projects that were once supported by zero interest rate policies (ZIRP) are now seen as more dependent on higher yields.

This is said to have attracted significant private capital dollars into physical infrastructure, outpacing investment in technology by six times.

SMID ceilings are expected to benefit as their sales growth is closely linked to this increase in pick and shovels investment, along with sectors such as utilities, industrials and real estate.