The future is often just more of the present

 

Some of the largest companies in the world are spending more money than ever, building data centers to produce and use artificial intelligence. The market is increasingly skeptical that these companies will earn reasonable returns given the scale of the spending. Skipping ahead to the conclusion: the profits are already here. 

The chart below details some recent history of capital expenditures (capex) for the 900 largest public companies in the U.S. What are capital expenditures? They are purchases of assets like buildings and equipment that are meant to last many years. The last few years show a marked increase both in total dollars spent and in the intensity of that spending as a percentage of sales.

The most recent data shows $1.4 trillion in total annual spending—and this is just for capital equipment and buildings. This does not include research and development (R&D) spending, which is also significant, with the latest figures indicating $650 billion in R&D spending over the last 12 months. When you combine the two, capital expenditures with R&D spending, it adds up to more than $2 trillion dollars of investment per year.

Why are the largest companies spending so much? Because this capital is driving a major productivity boom. The results aren’t far into the future; they’re already here. The S&P 900 companies are already seeing rising sales, profits, and profit per employee, with real cash flows.

 

Total operating cash flow (cash profits) has grown to more than $3.5 trillion annually. And cash profits per employee are now more than $100,000 per year, nearly double what they were ten years ago.  

This is what a productivity boom looks like. All of this spending is around building tools that make people more productive. This productivity enhancing spending will continue to increase from here, as will profits.

 

Best regards,

Evan McGoff