America in Cap-Ex Mode Can't Beat Buybacks as Bull Market Engine

  • History shows shares of companies doing buybacks outperform
  • Companies doing most cap-ex lag S&P 500 last two years

U.S. corporations gearing up to spend the most money in three years should be great news for the stock market, right?

Not so fast. As much as investors say they want to see corporate executives pouring cash into new plants and equipment, equity markets themselves show otherwise. Since the start of the bull market, companies that spend the most on share repurchases have outpaced those that doing capital expenditures, according to data compiled by Bloomberg.

An S&P Index tracking shares of companies that spend the most on buybacks has beaten one tracking cap-ex spenders by 40 percentage points since 2009.

After falling for two years, analysts predict expenditures at S&P 500 companies this year will climb to $76 a share, the highest since 2014, when spending totaled $78, data compiled by Bloomberg show.

So what could a cap-ex driven bull market look like? The past two years may give insight, as investor preference for buybacks started to balance out in 2015 to those spending on cap-ex. Since then the S&P 500 added an average 4.4 percent each year, compared with the average 15 percent annual gain in the first six years of the rally.