“We think the network effects of greater capital expenditure will be vast, both for the companies investing in their businesses and those downstream who generate more business as a result.”
Corporations constantly make decisions in the face of uncertainty—but the type of uncertainty matters. Is it cyclical and tied to the economic cycle, structural or even existential? The new U.S. Administration has added significant structural uncertainty1 to the already persistent economic concerns of recent years. The weight of these twin uncertainties has kept many corporate leaders hesitant to commit capital and make key business decisions for much of this year.
Why is capital expenditure important?
To remain competitive, businesses must reinvest their cash flow to maintain and grow their capital stock, better known as capital expenditures, or capex. Capital spending has two key economic implications. First, when companies earn returns on invested capital above their cost, they can create value for shareholders through compounding value-added returns on a growing asset base. This assumes management continues to make thoughtful capital allocation decisions, a topic we spend considerable time discussing with companies. Second, greater capex supports the broader economy by creating more business or revenue for capital goods providers, which typically supports employment and earnings.
Tech capex has material downstream impacts
As seen in Display 1, the internet services sub-sector has remained relatively immune to this overarching uncertainty—a strong example of capital dynamics at work. The artificial intelligence (AI) race continues at full speed, undeterred by either economic or secular global uncertainties. Not only are these companies likely compounding value on high returns, but they are doing so with excellent cash flows and enviable balance sheets.
The economic multiplier of this spending is significant—for example, steel companies provide materials for new data centers, industrials develop power and cooling solutions, and utilities scale up to meet the needs of power-hungry AI models.
But it is not just tech companies…
This dynamic is not constrained to the technology sector. Other (less discussed) sectors are also expected to increase their capex during the back half of 2025, on what we expect will be lower structural and economic concerns as uncertainty settles (Display 1). The average capex spend across industries is expected to increase 8% in 2025, a notable pickup from recent years. Outside of internet services and utilities power generation (for datacenter buildout), many of the industries listed as increasing their capex need to support their existing asset bases.
Capex Spending Growth by End-Market
Capex Spending Growth by End-Market
Display 1
We expect executive confidence to grow in the second half of the year as U.S. policy increasingly normalizes and tax reforms gain traction. In our view, both will help to improve the outlook for the second half of the year. We think the resulting relief will be both secular and economic, which, over time, could powerfully benefit capital spenders and recipients alike.
Bottom line: While uncertainty has defined the first half of 2025, we believe companies are adjusting to the new era of tariffs, trade and tax reform—and are refocusing on their long-term business plans. We think the network effects of greater capital expenditure will be vast, both for the companies investing in their businesses and those downstream who generate more business as a result. Certainly, capex business reinvestment will not be equal across all sectors. That’s why bottom-up, fundamental investing with deep company analysis is essential to identifying the most promising, forward-looking companies and investment opportunities.
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