POLAND - 2022/12/17: In this photo illustration a Lam Research logo seen displayed on a smartphone. ... [+] (Photo Illustration by Mateusz Slodkowski/SOPA Images/LightRocket via Getty Images)SOPA Images/LightRocket via Getty Images
Our theme of Capex Cycle Stocks – which includes heavy equipment makers, electrical systems suppliers, automation solutions providers, and semiconductor fabrication equipment players – declined by about 12% over 2022, outperforming the S&P 500 which was down by about 17%. Capital spending largely held up over the last year, despite rising interest rates and surging inflation. For example, according to S&P Dow Jones Indices, capital spending among companies in the S&P 500 was on track to grow by about 20% over Q3 2022, in line with growth rates seen over Q1 and Q2. There are multiple trends driving the growth in capital spending including a focus on boosting capacity and moving production back to the U.S. following the supply chain snarls of Covid-19 re-opening. Automation has also been a key theme for manufacturers, given surging labor costs. The $1 trillion U.S. infrastructure package, which was signed into law about a year ago, has also been driving demand for heavy machinery and tools. That being said, multiple economic indicators point to a recession in the U.S. The yield curve – seen as a very reliable indicator of a coming recession – remains inverted. The U.S. Fed continues with its hawkish stance despite cooling inflation, with more interest rate hikes due through 2023. U.S. manufacturing is also cooling off. S&P Global's purchasing managers index has declined to the lowest levels seen since June 2020 at a seasonally adjusted 46.2 in December 2022 and down from 57.7 in December 2021. It's possible that a weakening economy and higher interest rates could force companies to prioritize reducing their debt loads in the near term rather than boosting capital investments. Within our theme, Lam Research LRCX has been the weakest performer with its stock down by about 30% over the last 12 months. The company provides fabrication equipment and related services to the semiconductor sector. On the other side, Deere & Company DE , which manufactures agricultural machinery, heavy equipment, forestry machinery, and diesel engines, has been the strongest performer rising by about 15% over the past year. What if you're looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.
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