U.S. companies could plow more of the money saved from sweeping tax cuts into business investment later this year, perhaps even surpassing a jump in first-quarter capital expenditure that was the highest in almost seven years, strategists and analysts said.
Higher spending on technology, equipment and facilities could ease worries that S&P 500 companies have reached a peak in the profit growth investors are counting on to extend the nine-year bull market in equities.
The increased spending in the first quarter follows significant cuts in corporate taxes approved late last year by the Republican-led Congress. Companies have also been returning the tax cut windfall to shareholders via share buybacks and increased dividends at amounts never seen before, highlighted by Apple’s $23.5 billion repurchase in the first quarter.
With data in from 94 percent of S&P 500 companies, first-quarter capital expenditures total $159 billion, up more than 21 percent from a year ago and on track to be the highest year-over-year growth since the third quarter of 2011, according to S&P Dow Jones Indices data.
“These numbers are high, and I would expect higher numbers in capex this year. It takes a little bit longer for companies to plan and to execute” capital expenditure decisions, said Howard Silverblatt, senior index analyst at S&P Dow Jones.
That has the potential to underpin revenue gains well into next year, strategists said. Moreover, additional spending could extend the growth cycle for earnings if it results in increased sales and operating efficiencies.
The Tax Cuts and Jobs Act passed in December was also touted as a way to create more jobs, drive U.S. economic growth and level the playing field with companies based outside the United States. It slashed the corporate income tax rate to 21 percent from 35 percent and charges multinationals a one-time tax on profits held overseas.
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