Editor's note: Longtime readers will remember our friend Rob Spivey...
He's the director of research at our corporate affiliate Altimetry. There, Rob and his colleagues use their "Uniform Accounting" approach to dig deep into corporate earnings and offer a unique perspective on stocks and the markets.
Today's essay from Rob was recently published in yesterday's edition of the free Altimetry Daily Authority e-letter. And in it, he explains how corporate investments are laying the groundwork for strong earnings ahead...
Corporate America has squeezed the last bit of life out of its old machines...
Now, it's finally replacing them.
That may not seem important at first glance. But it's one of the clearest signs that this bull market still has room to run.
Investors have spent months focused on the obvious headlines: oil prices, the war in Iran, and the potential peace deal that could bring the conflict to an end.
The peace announcement on June 17 removed one of the market's biggest near-term headwinds. Sentiment and stocks have both rallied as a result.
But the more important signal this month isn't coming from geopolitics. It's coming from corporate balance sheets.
Companies are investing in themselves in a way we haven't seen in years...
We can see this using the net-to-gross property, plant, and equipment (PP&E) ratio. PP&E covers the physical assets companies use to run their businesses, including factories and data centers.
The "gross" number measures what a company originally paid for its assets. The "net" number subtracts depreciation, which reflects wear and tear over time.
Basically, the ratio tells us whether companies are letting their assets age or replacing them with newer equipment.
When the ratio is falling, companies are relying on older assets. They're delaying replacements and making do with what they have.
When the ratio is rising, the opposite is happening. Companies are updating aging assets, expanding capacity, and investing in future growth.
That's exactly what we're seeing today...
Following the pandemic, the net-to-gross PP&E ratio fell to an all-time low. But today, it sits at a 10-year high.
Take a look...
Companies aren't simply repairing old equipment and calling it growth. They're investing in AI infrastructure... manufacturing capacity... and the power systems needed to support both.
And we still need many more power plants and related infrastructure projects to keep up with what companies are planning.
Those projects take years to complete. So we're likely still in the early innings of this spending cycle.
Plus, new assets create new earnings power. A new factory can produce more efficiently. A larger data center can support more AI and cloud demand.
The payoff doesn't always show up immediately. But these investments lay the groundwork for stronger earnings over time.
We're already starting to see that in the expectations...
Uniform earnings growth forecasts across the market for 2026 have increased from roughly 15% to 19%. That's a big jump, and it lines up with what the PP&E ratio is telling us.
Corporate America isn't sitting around waiting for the Federal Reserve to lower rates or the next geopolitical twist. Companies are investing in growth. And that means the market can continue climbing from here.
That doesn't mean the market will move straight up. In fact, sentiment has gotten a little too bullish following the peace announcement.
But that's a short-term concern. The medium- and long-term outlooks remain strong.
As long as companies keep rebuilding their asset bases, any pullbacks should be treated as buying opportunities.
Regards,
Rob Spivey
Editor's note: Right now, Rob's colleague Joel Litman – Altimetry's founder and chief investment officer – is following an under-the-radar trend happening in AI...
Last week, he went on camera with Landon Swan – the co-founder of one of Fast Company's most innovative businesses – to share all the details.
As Joel and Landon say, three separate catalysts are poised to collide to create a critical moment related to the build-out for AI energy. And it could send a group of stocks soaring by as much as 10 times, 20 times, or even 50 times in the months ahead.
Get the full story here while you still have time to take advantage.
