What will likely happen to capital expenditures if the Federal Reserve slashes interest rates

Brian Sozzi

Get even more excited market bulls, history shows an interest rate cut from the Federal Reserve could ignite stagnant spending on capital expenditures and to a lesser extent R&D — and with it, the U.S. economy.

S&P 500 investment by growth (which accounts for spending on capex, R&D and M&A) grew by a median of 8% during the three quarters following the start of the past four Fed interest rate cutting cycles, according to new research from Goldman Sachs. Following the 1995 and 1998 “insurance cuts” — meaning the Fed cuts rates now during a period of growth to protect against a future growth slowdown — Goldman’s research shows investment for growth continued to expand for an impressive 12 quarters after the Fed’s first cut.

“Lower interest rates should reduce the hurdle rate for prospective capex investments and M&A transactions by lowering financing costs,” the Goldman team led by strategist David Kostin writes. The only caveat this time ahead of what looks to be an insurance cut later this week by the Fed: Companies may be more diverse in their cash outlays this rate cutting cycle.

“The current U.S. expansion is now the longest on record, and borrowing costs have been depressed for the past decade. As a result, although we expect growth in capex, R&D, and cash M&A, we expect companies will continue to increase cash return to shareholders as they have in recent years.”

Goldman estimates capital expenditure spending will rise 8% this year, R&D will jump 9% and cash acquisitions may gain 13%. The investment bank thinks S&P 500 buybacks will climb by 13% to a new all-time high of $940 billion this year.

Thank you in advance, Fed Chair Jerome Powell.

Business investment is down

The U.S. economy slowed to 2.1% growth in the second quarter from 3.1% in the first quarter. While consumer spending clocked in with an impressive 4.3% growth in the quarter, gross business investment — a measure of capex — plunged 5.5% as businesses grew more cautious on global trade conditions.

“Capex will improve if we have a rate cut,” Fort Pitt Capital Group portfolio specialist Carter Henderson told Yahoo Finance.

But some on Wall Street don’t think a rate cut will unlock a yearend capex spending boom. With U.S.-China trade relations in the tank and growth cooling domestically, businesses could very well stay cautious on investing in new plant and equipment and even R&D.

“Companies aren’t sure what the playing field is,” contends PNC Financial Co-chief Investment Officer Jeff Mills. “That’s more important to capex plans.”

Brian Sozzi is an editor-at-large and co-host of The First Trade at Yahoo Finance. Follow him on Twitter @BrianSozzi

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