MORE FROM YOUR MONEY 2025 - 3/4

 

No cap on capex…

As most of you know, I’m an avid reader. What I’ve always found challenging is how to take that knowledge and apply it to my work or personal domain. More recently, as I’ve been reading through various earnings reports, I couldn’t help but be reminded of an intriguing book I read about a decade ago. Capital in the Twenty First Century, by Thomas Piketty is a book that helped reinforce some deeply held beliefs about wealth and capital. More recently we are seeing a very strong trend regarding said capital…that being consistently higher levels of capital expenditure (CAPEX). In particular, the CAPEX being projected by the 7 largest companies on the S&P 500, also known as the “Mega 7”. Thinking back to Piketty’s book, it’s quite apparent that equity markets share his view on capital, and have already begun to price in some of his theories.

 

Piketty on Capital…

While the general theme of Piketty’s book is that unbridled capitalism can lead to increasing levels of inequality, the central tenet of the argument comes from the concept that the returns on capital are generally higher than the overall growth rate of the underlying economy. Without getting too technical…the concept is that capital begets more capital…the wealthy get wealthier. While this may be an obvious comment, I think it’s important to look at how this is impacting the current state of financial markets as well as how it may effect various industries and companies.

 

As I have mentioned earlier, we continue to see CAPEX rise, in particular from technological sectors such as chip makers, data centers, and AI firms. Certainly the initial reaction could be to worry that these mega companies will continue to get larger and with it their control over commerce, however the market tends to have a way of rewarding risk takers and innovators. The last decades capital and wealth leaders almost certainly will not be the next decades leaders (virtually no one predicted that a video game chip maker would become the largest company on the planet). While it’s obvious that the goal of investing in CAPEX is to have more productivity, and with it more profitable businesses, we may be missing what I feel is an even more important concept. That being the “trickle down” of that capital spending, and the breadth expansion of this current cycle.

 

Let’s consider data centers. Yes, these massive facilities could provide incredible ROI for search firms, as well as AI companies, not to mention chip makers, and hardware companies, however, we can’t forget what goes into building these megaplexes. Take energy…conservative estimates are that a large data center will now use somewhere in the neighborhood of the energy equivalent of an 800,000 person city. (A side note here on rising efficiency and productivity…just 3 years ago that estimate was over 1,000,000 persons). Imagine an investor going to the local utility and asking them to help provide that kind of electricity. As a result many of these companies have been forced to provide their own power…real capex…real capital. At the same time these facilities use mountains of raw materials and manufactured product. Things like aluminum for HVAC, concrete for a base, iron for rebar, fiber for wiring, electrical transformers to harness the energy…the list goes on.

 

Getting back to Piketty, obviously he makes some very good points. The companies that are currently making the most money will almost certainly become wealthier as they invest in capital, and while this may create inequality amongst companies, personally, I see opportunity. To me the opportunity lies not only in the capital owners, but also in the companies that build the capital. If company A is going to spend $84 billion dollars on CAPEX next year…surely some of that will be used to buy goods from companies that are not in the Mega 7…and therein lies the opportunity.

 

The Inequality Problem…

As a sidebar to Piketty’s thoughts on capital and returns on capital, as owners of capital and wealth, we most certainly should be concerned with rising inequality (Piketty also mentions that inequality leads to more civil unrest)…however, I would also suggest that in North America, we have some fairly aggressive wealth redistribution through the tax system, be it by estate taxes, payroll or sales taxes, or even municipal taxes. Not to mention, we don’t necessarily want to disincentivize productivity growth. Most economists would agree that as productivity goes up…so to does the overall standard of living and wealth. Not to mention, that some of the largest capital owners and investors are governments themselves…for the people by the people.

 

Let’s not forget seasonality…

If you couldn’t tell, I am an optimist…and for many of the reasons above, I am fairly optimistic about the future of equity markets. However, for the next couple months, we will need to keep seasonality in mind. September and October are historically weaker months for equity markets…even still I would treat this as an opportunity to top up equity positions. Just last week we had a very bullish turn from the U.S. Fed. The signal that interest rates would begin easing…and while it wasn’t enough to keep the people at the White House happy, I would say that in general, lower interest rates are good news for equity valuations. I have discussed this concept in previous articles, but suffice to say the “Discount Function” is your friend as an equity investor.

 

Tips and Tricks from the Admins…

Now that fall is here, football season is back! There’s nothing we love more than cozying up on a Sunday afternoon, yelling at the television. We thought it would be fun to predict the 2026 Super Bowl winners to challenge our football intuition. This year our team thinks the Buffalo Bills will make it happen! Until then, enjoy watching the game with your friends and families. Happy Thanksgiving!

 

Angela, Helen and Gigi

 

The Closing Bell…

As I’ve mentioned to many of you more recently…this has been the year of “despite”. We have had a very good year investment wise…despite tariffs, despite political instability around the world, despite what could be the largest technological innovation in history. While there is a lot yet to be determined as it relates to the path of growth, there are certainly many tailwinds developing despite the many reasons equity markets could reflect a much more negative sentiment. An old traders adage is that if markets are rising in the face of negative news, it absolutely should be viewed as bullish. Either way, I hope everyone has a great fall…it’s been a good start!

 

“Democracy will never be supplanted by a republic of experts—and that is a very good thing.”

-Thomas Piketty

 

 

By: Mike Van Berkel 

 

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Michael Van Berkel is an Investment Advisor with CIBC Wood Gundy in Barrie, Ontario. The views of Michael Van Berkel do not necessarily reflect those of CIBC World Markets Inc. Clients are advised to seek advice regarding their particular circumstances from their personal tax and legal advisors.