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“It’s a huge opportunity for investors”

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Josh Brown, CEO of Ritholtz Wealth Management thinks there is momentum building for companies to start spending money again and that boost in capital expenditures could lead to all kinds of positives for the economy and the market. “They’re all talking about capex expansion this year; they’re all talking about growth initiatives,” said Brown. “I think the psychology right now is that this could finally be a breakout year for corporate spending.”

According to the Wall Street Journal, analysts surveyed by FactSet are predicting a huge jump in capital expenditures this year, with a gain of 6% after a paltry 1% last year. Yahoo Finance Editor-in-Chief Aaron Task said corporate capital spending is what has been missing from the economy. “Capex spending has been a critical missing piece of the puzzle in this recovery,” he said. “It would be great news for the economy and for employment.”

Not the end of the world

While additional spending on investments in corporate infrastructure and hiring would be good news for the economy, the moves could lead to wage inflation and it remains to be seen how the markets would react to upward pressure on wages.

Brown sees more upside than downside. “I don’t think most investors would mind, quite frankly, having a scenario in which wages start to go up, corporations start to spend more money, the buybacks cease, but it’s replaced by higher capex and you get kind of a flattish market,” he said. “I really don’t look at that as the end of the world.”

The S&P 500 was up about 30% in 2013. Brown said if you annualized that rate with this year’s basically flat market, you end up with a 15% gain and he says that’s ok. “We don’t need to have a 30% rally every year,” said Brown. “If we have a flat year because expectations for [interest] rates are kind of being adjusted and in the meantime the real economy improves, not just the capital markets and you start to see that wealth gap close a little bit, that’s a win.”

"A huge opportunity"

Regardless of what the overall market performance looks like in that scenario, there will be areas that benefit disproportionately from a strengthening economy and increased corporate investment, according to Brown. “People don’t understand the extent to which corporate spending and capex has been restrained. Over the last five years, it’s been running at about a 1% run-rate, whereas it’s supposed to be closer to 5% in an economic cycle that’s recovering,” he said. “I think it’s a huge opportunity for investors, but you’ll have to pick your spots, because it won’t hit every area of the market the same.”

So which spots would Brown pick? Two areas of the market he thinks will benefit from increased corporate investment: technology and industrials