Thanks to the Fed’s hawkish rate hikes, investors are concentrating on short-term gains and CEOs are shying away from laying out money for big long-term projects, contends an article in The Wall Street Journal. Speculative long-term bets lost their allure last year amidst the slowdown in growth companies, and that’s now spread to even the big-name growth stocks such as Meta. Investors simply do not want to put their money into ambitious, long-term ventures that are uncertain to bring any returns any time soon.
Instead, investors want real returns and payouts right now, and companies are beginning to play along by focusing on today’s profits instead of tomorrow’s earnings. Projects that have more predictable payoffs are still finding capital, with many companies still funding research & development while cutting spending on buybacks. But that could change next year, Ryan Hammond of Goldman Sachs told The Journal, predicting a steep decline in the growth rate of capex. “There’s some skepticism about investing at a time when the economy is slowing, will the [return on investment] reward the higher cost of capital?” Hammond says. And indeed, the number of business leaders who plan to up their capital spending is at its lowest point since 2013, according to data from the New York Federal Reserve.
And while some forms of capex look positive, much of that reflects past easy money that is still being factored in. But companies are still spending; a majority of firms are planning to increase their spending on green initiatives and non-tech equipment, while decreasing capex on real estate and technology. It’s a big shift from the last decade, when the marketplace was keen to finance long-term projects, even those that were destined to fail. While weeding out the doomed-to-fail ventures is a positive step, there’s always a risk that some worthwhile ventures will be thrown out as well, the article portends.
As the market applies a much higher cost of capital through lower share prices and elevated borrowing rates, capex for expansion could be the next item on the chopping block—unless the investment is a short-term project that is likely to produce an immediate payoff. In that circumstance, companies with solid balance sheets and large cash reserves will outperform those that keep funneling capital back into growth, and only those companies that have the highest levels of innovation, an enormous stockpile of cash and no need to bow to shareholder pressure will be able to make the kind of pie-in-the-sky, “high-risk, high-reward bets” that dominated the last decade.