Stocks Should See a Boost from Business Spending

Since the end of the financial crisis, business fixed investment has been volatile, an unusual development in light of the steady growth in payrolls. But changes are afoot, and business investment is on pace for its best year since 2011.

While some may be quick to ascribe this improvement to shifting political winds, there are more fundamental factors at play, making this a good-news story for the stock market. Capital spending is an important driver of S&P 500 Index earnings, as equipment is an input for some companies and an output for many others. Moreover, increases in spending should lead to stronger labor productivity, benefiting corporate profit margins. And if productivity returns to more normal growth rates, that implies stronger potential gross domestic product growth and higher risk free interest rates.