Consider this data point:  In its 4th-quarter earnings call, Amazon said it spent  $26.3 billion on capital expenditures during the quarter  and would continue to spend  at that same rate  during 2025.    The math is easy:   26.3 times 4 equals $105.2 billion.  Let me repeat:   Amazon plans to spend — well, invest, really — over $105 billion of its retained earnings in 2025.    That is a staggering amount.   

Of course, Amazon is only one of the ‘Magnificant 7‘ companies in the S&P 500.   With the sole exception of Tesla, 6 of the 7 plan to invest MASSIVE amounts of their retained earnings into “AI infrastructure” in 2025.    And I mean massive:  In addition to the $105 billion Amazon plans to spend in 2025, Microsoft and Google are close behind at $80 billion and $75 billion, respectively.   Then you have Meta, Apple and Nvidia at $60, $50, and $30 billion, respectively.

Add it up and we have close to  $400 billion  in 2025 capital expenditures for AI infrastructure.   You know, things like ‘data centers’ and the like.    This bears repeating and emphasis:

 

2025 cap-ex for the ‘Magnificant 7’ (ex-Tesla) will reach almost $400 billion!

 

These numbers are staggering in size and scale.   And they beg a few questions:  What does this mean the the US economy at large?   And what can we glean about the impact of this investment on these companies specifically?   Let’s dive in.

 

Welcome to this week’s Steak House Index update.

 

If you are new to my blog, or you need a refresher on the SHI10, or its objective and methodology, I suggest you open and read the original BLOG: https://www.steakhouseindex.com/move-over-big-mac-index-here-comes-the-steak-house-index/

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Why You Should Care:   The US economy and US dollar are the bedrock of the world’s economy.   But is the US economy expanding or contracting?

Expanding … according the ‘advanced’ reading just released by the BEA, Q3, 2024 GDP grew — in ‘current-dollar‘ terms — at the annual rate of 4.7%.

The ‘real’ growth rate — the number most often touted in the mainstream media — was 2.8%.   In current dollar terms, US annual economic output rose to $29.35 trillion.

According to the IMF, the world’s annual GDP  expanded  to over $105 trillion in 2023.   Further, IMF expects global GDP to reach almost $135 trillion by 2028 — an increase of more than 28% in just 5 years.

America’s GDP remains around 25% of all global GDP.  Collectively, the US, the European Common Market, and China generate about 70% of the global economic output.  These are the 3 big, global players.   They bear close scrutiny.

 

The objective of this blog is singular.

 

It attempts to predict the direction of our GDP ahead of official economic releases.  Historically, ‘personal consumption expenditures,’ or PCE, has been the largest component of US GDP growth — typically about 2/3 of all GDP growth.  In fact, the majority of all GDP increases (or declines) usually results from (increases or decreases in) consumer spending.  Consumer spending is clearly a critical financial metric.  In all likelihood, the most important financial metric. The Steak House Index focuses right here … on the “consumer spending” metric.  I intend the SHI10 is to be predictive, anticipating where the economy is going – not where it’s been.

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Taking action:  Keep up with this weekly BLOG update.  Not only will we cover the SHI and SHI10, but we’ll explore “fun” items of economic importance.   Hopefully you find the discussion fun, too.

If the SHI10 index moves appreciably -– either showing massive improvement or significant declines –- indicating growing economic strength or a potential recession, we’ll discuss possible actions at that time.

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The Blog:

 

$400 billion in 2025 cap-ex number is truly unprecedented.   But only in scale … these companies have been spending at a furious rate for years:

 

 

Every calendar quarter, since 2020, as you see above, the combined ‘Meta/Google/Microsoft/Amazon’ capital expenditure has totaled about $25 billion per quarter or more.

But in 2025, that number will balloon to almost $100 billion each and every quarter for the 6 ‘magnificent 7’ companies combined.

$400 billion.   For cap-ex in just one year.   Staggering.    General Motors has a market cap of about $47 billion.    In 2025, these 6 companies will spend almost 10X the GM market cap on cap-ex.   In one year!    Coca-Cola was founded almost 140 years ago.   Their market capitalization is less than $300 billion.    The mag-6 cap-ex in 2025 will exceed Coca-Cola’s market cap by more than $100 billion.    JP Morgan & Co, one of the world’s most valuable financial institutions, has a market value of less than $800 billion.   Founded in 1799, JPM’s total company value is only 2X what these 6 companies will spend in 2025 for capital expenditures.    You get the point. 

Here’s why I’m puzzled:  Deep Seek.  

If we believe the media and hype, Deep Seek was able to replicate, and if not replicate, at least match-in-kind, the artificial intelligence functionality of ChatGPT, Google, Meta, Microsoft, etc. spending only $6 million.    That’s right $6 million.   That’s their claim.   Essentially, we are supposed to believe that this small Chinese upstart company, the brain-child of a clearly brilliant young man in the private equity business, built an AI model — again, for $6 million — comparable to those built by our largest US tech companies — but who have collectively spent many hundreds of billions of dollars.  I didn’t believe it then.  I don’t believe it now.  

Of course, after this announcement from Deep Seek that shocked the world, the mag-6 companies collectively announce that they expect to spend $400 billion more in 2025 capital expenditures in AI infrastructure.   Not only did they not respond to the Deep Seek news with a comment like, “OH MY GOD!   WE BETTER STOP SPENDING OUR RETAINED EARNINGS ON WORTHLESS STUFF!”   No, not only did they not say they, they doubled down.   They increased spending significantly and dramatically. 

Are these companies nuts?   Or do they know something you and I don’t know? 

I’m going with the latter.   Because these 6 companies definitely know how to make money.   Consider the chart below:

Remember:    That’s just one year’s earnings.   These companies made a collective $634 billion in 2024.   Amazing.  Is it possible that knowing all they know about Deep Seek today these companies are throwing away their hard-earned retained earnings on on worthless beans, just as the mythical Jack did in the beanstalk story?   Sure, it’s possible.   But it’s not likely. 

No, I suspect they recognize the Deep Seek “issue” for what it is:   Insignificant.   Amazon, Meta, Microsoft, Apple, Google and Nvidia are chock-full of extremely capable, smart people.   If they were worried, even one little bit, about the Deep Seek impact on the future of AI, they would not be plowing ahead with their massive capital expenditures.  

Capital expenditure is typically an investment of retained earnings.   Retained earnings that are “invested” in cap-ex are invested with the expectation they will generate a sizable return, year after year into the future.   How sizable?  Well research suggests the average annual “return on equity” for these 6 companies is 38%.    That’s right:   38%.   In fact, the ROE numbers for each, ranges from a low of 22% for Amazon to a high of 144% for Apple.  

Remember:   This is an  annual  return on equity number.    These companies earn this ROE each and every year.   In theory.   So, after a little math, we can conclude these 6 companies are expecting their 2025 AI infrastructure capex investment will generate about $150 billion per year of additional earnings.   This is on top of their already exceptional earnings results. 

What might an additional $150 billion of annual earnings be worth vis-à-vis the combined impact on their stock prices?   That question is fairly easy to answer today.   The ‘Magnificent 7’ have a collective ‘price/earnings ratio’ — or PE ratio — of about 35 in today’s market.    Which means that an additional $150 billion in annual earnings translates to about an additional $5 trillion in market capitalization.   So, in theory, the expenditure of $400 billion should translate to an additional $5 trillion of market cap for 6 of the magnificent 7 companies.   That’s what the math suggests … but, of course, this is all hypothetical.   Among other things, it assumes historic ROE and PE ratios remain somewhat constant.   This may or may not happen.   Time will tell.

Regardless I do expect the cap-ex will significantly increase their earnings.   Even more significant, however, is the impact on the economy over all.   Let me explain.

I believe the ‘answer’ to my somewhat rhetorical question above — “What Am I Missing?” is this:   Productivity.   I believe these companies are convinced their continuing investment in AI infrastructure will spur US labor force productivity.   

Remember that productivity is essentially a measure of “how much stuff” is produced by a human being during a consistent measure of time.   For example, suppose before a technical or mechanical advancement, one person was able to produce 10 Gillette razor blades in one hour.    But after that advancement, the same person was able to produce 11.   That equates to a 10% improvement in productivity.  In the macro, over time, increased productivity across the entire 160 million civilian labor force translates into increasing output from a stable labor force, which increases GDP growth rates, which ultimately translates to an overall increase in “GDP per capita,” which essentially means all American incomes increase commensurately.   Over time.   This is a very good thing. 

Essentially, I believe, our high-tech companies are convinced internal productivity will surge as the direct result of their capital expenditure binge.  I hope they’re right.  They are not alone in this belief.    Various FED presidents have written extensively on this topic.   Here’s a great paper if you want to dive deeper.   Just click here

Finally on this topic, I want to be sure to say this:   I am not suggesting you buy these stocks.  Your investment decisions are your own and I am not offering investment advice here.     I own them all.   But that’s my choice.    My comments above are simply my personal observations and opinions.   

Shall we head to the steakhouses? 

First off, wow!   Check out that SHI10 reading!

 

 

At first glance, it’s clear most reservations for our party of 4 this Saturday evening are already spoken for.    The SHI10 reading of 508 is the highest reading we’ve seen in more than a year.   But on further reflection, the explanation is likely less economic strength than love.   Yes, love is in the air.   Friday is Valentines Day.   That is likely the cause for the huge bump in reservation demand.   

 

 

But even accounting for the ‘Valentine’s Day Effect,’ this weeks SHI10 is more than 104 points higher than this week’s reading one year ago.   Meaning the demand for reservations is exceptionally strong this year — far higher than last year at this time.   And that, my friends, does not happen if young lovers cannot afford the dinner bill at Mastros.   No, today it’s likely to cost a party of 4 between $600-800 for a lovely evening at our expensive eateries.    The price of love, along with everything else, is up.   🙂

I’ll finish today’s blog with a warning:   Folks, I hate to be the bearer of bad news, but you can’t believe everything you read in the media.   Consider this headline, published a couple days ago in  Newsweek  Magazine.    It read:

 

LA Homes Selling for Half the Price After Fires:  ‘Used To Be Paradise’

 

Wow, right!?   Homes in Pacific Palisades are half-price now?    I don’t know about you, but I’m heading up to buy a few.  That’s one heck of a great deal.   But, before you drive up to LA, you might want to read the article itself by clicking  here

When you do, you will learn that the “LA home” in question is not, in fact, a home.   No, the home is gone.   Burnt to the ground.   What sold for half the value of the home before the fire was, in fact, just the lot.   The article refers to it as the “burnt site.”  

So, once again, I am bursting your bubble with the plain and simple fact.   Sorry about that.   Homes in LA are not selling for half price.  The statement is absurd.  The author is a moron.   Talk about adding insult to injury.  Because it goes without saying that empty home sites are almost always worth less than a site plus a home.   There is no story here.  

So, no, there is no half-priced sale up in LA.   You might be able to buy an empty lot, if you’re interested.  And, maybe if you’re lucky, you might also get a slightly singed brick chimney included in that price. 

<:  Terry Liebman:>