What’s Driving the Billions in New Business Investment?

According to data from the U.S. Department of the Treasury, U.S. businesses have been investing at a higher than expected clip over the past several years. By the numbers, Treasury estimates that since 2019, businesses have invested $430 billion more than what would have been expected based on historical trend lines. As seen in the chart below, business investment (private nonresidential fixed investment) in dollar terms has been quite strong since 2021.¹

A key driver, but not the primary driver, of increased investment has been in manufacturing/factory construction. There are two forces at work here, in our view. The first is the trend of “onshoring” following the Covid-19 pandemic, as companies shift to developing more resilient supply chains closer to home. The second force has been the tens of billions of dollars in federal subsidies related to the CHIPS Act, which seeks to invest heavily in semiconductor manufacturing in the U.S. It follows that factory building has concentrated in the computer, electrical, and electronic sectors.

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The primary driver of increased investment is a category that many readers may be able to guess if given the chance: artificial intelligence infrastructure.

Indeed, mega-cap technology companies—and in particular, what is known as “AI hyperscalers” have been shelling out billions upon billions for the buildout of AI infrastructure, namely in data centers.

Without getting too technical, it’s important to understand that Artificial Intelligence (AI)—especially modern machine learning models like deep neural networks—requires immense computational resources for training and inference. Data centers are where these computational resources are housed.

We’ve already seen a massive wave of investment and profitability in the data center space, with the surge of cloud-based hosting and services that arrived in the 2010s. Led by Amazon Web Services and Microsoft Azure, software was increasingly moving away from corporate premises (‘on prem’) and being developed and maintained in a data center (the cloud) and delivered using high-speed access technologies to the home/office PC or phones/laptops/tablets remotely. Amazon Web Services pioneered cloud computing for companies like Netflix to stream movies and Salesforce.com to host their software, for instance.

Cloud data centers were built with mostly CPUs. But AI needs mostly GPUs. That’s why we’re seeing a massive boom in the already large data center market, as many more data centers are needed to support new AI businesses (including healthcare AI, materials science AI, robotics, and so on). Sovereign nations are even building their data centers.

The result is an investment (capex) that is orders of magnitude greater than it was just a decade ago.

To use an analogy, think of AI as a massive new labor force about to enter the global economy. Data centers are where this new, massive labor force is being created, where it is being trained, and where it will work. That means the numbers in the above, longer-term, will likely rise into the thousands.

Bottom Line for Investors

Some investors worry about the return on investment (ROI) of massive capital expenditures on data centers. What if the AI revolution takes longer to generate the vast amounts of productivity and economic growth that is currently being projected? Or what if the investment does not pay off at all?

Those questions remain, but for the time being the sheer level of new business investment is reverberating across the economy. And according to the U.S. Treasury, the outlook for future business investment growth is encouraging. Firms are observing persistently high returns to their capital, and founders are starting new businesses at historic rates.

Despite the recent focus on AI and big tech stocks, for most investors the best way to achieve long-term goals is by owning a diversified portfolio of stocks and/or ETFs. In fact, “diversify your portfolio” is one the most basic pieces of investing advice. Sadly, in our experience many investors still put all (or most) of their eggs in one basket.

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¹ U.S. Treasury. June 12, 2024.

² Fred Economic Data. July 25, 2024.

³ Zacks Investment Management may amend or rescind the Is Your Investment Portfolio Actually Well-Diversified? guide offer for any reason and at Zacks Investment Management’s discretion.

⁴ J.P. Morgan 2024.

⁵ Visual Capitalist. 2024.

⁶ Zacks Investment Management may amend or rescind the Is Your Investment Portfolio Actually Well-Diversified? guide offer for any reason and at Zacks Investment Management’s discretion.

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