Capex and Confidence
A capex boom that boosts margins and productivity is crucial for equities; it is still possible in 2H25 but fiscal, regulatory and monetary policy changes are necessary.
This week’s note covers the employment and GDP reports, monetary and fiscal policy and our outlook for a secular capex boom. We’ve been bullish equities since early April, and nothing that occurred this week altered our outlook.
Employment Report: Mixed Signals
April's employment data delivered mixed results. Nonfarm payrolls increased by 177,000, but this figure was inflated by downward revisions to prior months and a large boost from the BLS’s birth/death model. In contrast, ADP reported a modest 62,000 gain. The household survey painted a stronger picture with a 436,000 employment rise and a 518,000 labor force expansion, which pushed unemployment down by 660,000. Despite tighter labor market indicators, wage growth cooled, aligning with the Fed’s stance that the labor market is not a key inflation driver. Industry data showed job gains concentrated in education and health, while overall government hiring stayed positive.
The Detox Process Begins
Q1 GDP highlighted two key shifts: government spending declined, while private capital investment began to recover. Government expenditures subtracted from growth for the first time in several quarters, while nonresidential investment rebounded due to strong AI-related spending in information processing. However, trade policy weighed heavily—net exports dragged GDP by 4.83 percentage points.
Capital Investment Dynamics
Capital investment is crucial for the equity market and the industrial policy cleanup. Long-term shifts—including China’s demographic changes, rising costs, and repeated supply chain shocks—have eroded the appeal of offshore manufacturing. U.S. capex booms in the ‘60s and ‘90s were driven by tax reform and price stability. Today, the foundation is present, but recent fiscal excesses have heightened price volatility.
Capital spending dipped in 2024 as expected during an election year. Optimism surged post-election and Fed cuts but fell back with new tariff announcements—mirroring past patterns. A recovery is possible if pro-growth policies are enacted swiftly.
Reconciliation Takes Shape
The reconciliation bill aims to restore expired investment tax incentives and add accelerated depreciation. Despite political caution around spending cuts, some progress has been made with student loan reforms and upcoming Medicaid proposals. Stabilizing capital costs for small businesses also hinges on further Fed rate cuts and reversing restrictive bank regulations to restore regional bank profitability.
Equity Market Landscape
While strong tech earnings raised the specter of a return to the narrow 2024 rally, recent market gains were led by cyclicals—industrials, transports, financials, and smaller caps—reflecting broad-based optimism. A sustained rally in these groups will require trade progress and monetary easing. Tech sector revisions may be bottoming, but other tech related sector revisions lag behind.
