The Widening Gap: S&P 500 Titans Drive Capex Surge, Dividing Corporate America

As fourth-quarter earnings season unfolds, a stark divide is emerging between the seven largest companies in the S&P 500 Index and their counterparts. The "Magnificent Seven" are aggressively increasing capital expenditures (capex), while the remaining 493 companies struggle to keep pace.

Spending Surge for the Titans

According to Societe Generale analysts, the Magnificent Seven companies (commonly identified by their ticker symbols) are expected to boost capex by 40% in 2024 compared to the previous year. This surge in spending targets property and equipment acquisitions, fueling their business growth.

In contrast, the remaining S&P 500 companies saw a mere 3.5% increase in capital expenses last year. The analysts attribute this disparity to declining operating cash flow among companies outside the elite group and the financial sector.

Magnificent Seven Drive Index Performance

For several years, the Magnificent Seven have been the growth engine for the S&P 500 Index. Their profits, sales, and cash reserves have consistently outpaced the broader market. Forecasts indicate a 34% jump in earnings for the group in 2024, while the rest of the S&P 500 is projected to experience a modest 5% growth.

Concerns of Market Underperformance

Despite the spending spree, analysts caution that high capex is not always a recipe for market success. Historically, companies with high capital expenditures have underperformed the S&P 500. This has been the case for the Goldman Sachs index of 50 U.S. companies with the largest capex and R&D spending, which is poised to lag the S&P 500 for the fifth consecutive quarter.

Concerns have deepened recently with the emergence of DeepSeek, a Chinese startup that has developed an AI model comparable to those created by top American AI companies. DeepSeek claims to have achieved this feat with less powerful hardware and at a fraction of the cost.

Fears of AI Investment Risk

The massive potential of AI continues to drive tech giants to invest heavily in research and development. However, concerns persist that the return on these investments may not materialize anytime soon. This sentiment intensified after the news of DeepSeek's AI breakthrough.

Broader Market Reality

Meanwhile, the remaining 493 companies face a different set of challenges. Persistent inflation, high interest rates, and looming trade wars are dampening their growth prospects. "Uncertainty is another enemy of capex," says Eric Diton, president of the Wealth Alliance. "Companies may be reluctant to make large investments if they are vulnerable to tariffs."

Trade War Fallout

On Monday, President Trump announced tariffs on Mexican and Canadian imports, which were later paused for 30 days. On Tuesday, 10% tariffs were imposed on Chinese imports, prompting Beijing to retaliate with its own tariffs. Additionally, Beijing has launched an antitrust probe into Google and tightened controls on critical mineral exports.

"Uncertainty is rampant right now, which hinders capex," concludes Diton.