The Variable Driving Stock Market Growth
You might have noticed some serious gains if you’ve been paying attention to the stock market lately. One of the biggest drivers for this growth has been the capital expenditures (“capex”) of big technology companies, including Alphabet, Amazon (AWS), META, Microsoft, and others.
“Capex” is the money companies spend on long-term assets like buildings, equipment, or technology. For these companies, this often means pouring billions into data centers, technology chips, and other infrastructure.
The chart on the left blows my mind. They are spending about 5x as much of their annual “budget” (free cash flow) as they were 10 years ago (40% now vs. 10% in 2015).
Consider that kind of drastic change in spending on your budget. If you were spending 5x more of your income on vacations than 10 years ago, I’d say you probably realized time away is worth valuing.
Big tech has realized that investing enormous amounts of money can drive higher revenues over the long run. Take one of these examples: Alphabet (Google). When they invest in these things, they collect better user data. They then package that data and sell advertisement opportunities to businesses. Whereas 10 years ago, a business might be able to target “men over the age of 65,” – now they might be able to target “men over 65 in this zip code who are browsing for trucks online and have a household income over $200,000.” That type of data is invaluable to businesses, so they pay Google more for it.
When Capex is done well, most of the stock market benefits. The company Google pays for this infrastructure makes money. Google makes money. Businesses using Google also grow.
When not done well, it also saturates itself into the market. This is why I think Capex is one of the best engines for growth over the coming decade, but it also poses one of the biggest risks in the short run if not handled well. For investors, it’s a variable worth watching closely.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.