Companies Are Still Boosting Capital Spending Despite Higher Rates

Spending on categories like real estate, equipment and technology is usually welcomed by investors and viewed as a sign of confidence from executives who are trying to expand operations and fuel growth. But investors are punishing some companies, like

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META -1.69%

parent Meta Platforms Inc., that spend big sums on moonshot projects that don’t have clear benefits.  

“The company’s biggest bang for the buck is typically investing in its own growth prospects,” said

Bryan Reilly,

a managing director and portfolio manager at CIBC Private Wealth US, who says he favors investing in companies with high free cash flow and healthy balance sheets.

In light of the uncertain economic backdrop, some investors say they are looking for companies that can keep spending prudently on projects that will pay rewards in the short term. They hope these companies would be well-positioned to gain market share and emerge from a potential recession in a better shape than peers. 

At the same time, they say they are less willing to wait to see if big-ticket expenditures pay off as the Federal Reserve continues aggressively raising interest rates. 

“Investors have to look beyond the cool idea,” said

Stephen Lee,

founding principal at Logan Capital Management. “There’s more inherent skepticism than when interest rates were at zero and capital was easy to get.”

Mr. Lee said his firm had looked for opportunities to add to its stake in Meta Platforms, but chose not to after the company reported last month a significant increase in spending on capital projects. Logan Capital now views its relatively small position in Meta as an “earlier stage investment” to account for expected volatility and risk, Mr. Lee said.

Meta spent $9.5 billion on capital projects in the third quarter, the second-largest sum among companies in the S&P 500 and more than double its spending the year prior. The tech giant projected capital expenditures of up to $39 billion in 2023. 

Wall Street analysts on Meta’s conference call grilled executives to justify the investments earmarked for expanding artificial-intelligence capabilities. Chief Executive

Mark Zuckerberg

expressed confidence that his initiatives would reward shareholders who showed patience. The next day, Meta’s stock plunged 25% to its lowest level since 2016.

Meta later narrowed its 2023 capital spending outlook and announced layoffs of 13% of its workforce. The stock rallied 24% last week.

“The more innovative the capex is likely to be, the more skepticism it’s likely to be received with,” said

Aoifinn Devitt,

chief investment officer at investment adviser Moneta.

That shift in outlook underscores how this year’s brutal market environment is recalibrating long-held investment strategies. Rising rates mean Treasurys offer higher yields, making risk assets like stocks look less attractive. Slowing economic growth is testing corporate balance sheets. As a result, investors say they have become more discerning about companies’ deployment of capital and the associated risk.

Energy companies are ramping up spending at the fastest pace of the groups in the S&P 500, according to

Bank of America Corp.

data. A tight global energy supply and rising oil prices have helped the sector emerge as a standout in the stock market this year. Corporate profits have swelled, prompting companies to expand capital projects to keep up with demand.

Occidental Petroleum Corp.

increased its capital spending to $3 billion in the nine months ended in September, from $1.9 billion in the same period last year. The oil-and-gas producer last week also forecast increased capital spending in its current quarter. The stock fell 9.2% the day it reported results but is still by far the best performer in the S&P 500 in 2022; shares have more than doubled.

Other companies are spending to bring production to the U.S. to stem persistent supply-chain challenges that have led to shipping delays and shortages of key products such as semiconductors. Mentions of “reshoring” during earnings conference calls have skyrocketed in 2022, according to Bank of America.

Eric Wightman,

senior wealth adviser and partner at XML Financial Group, said he’s bullish on industrials stocks as companies participate in those longer-term reshoring and automation trends. Capital spending is “one of the first things I look at,” he said. “I want to make sure companies are reinvesting back in the business and getting a decent return on their capital.”

Tyson Foods

on Monday forecast plans to spend about $2.5 billion on capital projects in 2023, up from $1.9 billion in 2022, while also reporting a decline in profits for its latest quarter. Executives said the ramp-up in spending could be attributed partially to rising prices, but primarily focused on heavier investments in automation. Tyson shares are down 26% this year.

Looking ahead, capital expenditures typically pick up in the fourth quarter, according to

Howard Silverblatt,

senior index analyst at S&P Dow Jones Indices. However, he believes spending could slow moving forward—as it has for share buybacks and dividend growth—while companies buckle in for the uncertainty ahead.

Stock repurchases are on pace for 11% decline in the third quarter from a year earlier at roughly $180 billion, S&P Dow Jones Indices data through Monday show. Dividend payments, which are committed before the quarter begins, rose about 8% to $140 billion.

Companies are often quicker to cut buyback spending because it’s easier for executives to adjust repurchases, while investors come to expect dividends and capital spending can often be planned for years in advance, Mr. Silverblatt said.

During recessionary periods, “that’s when companies want to hit a home run” with their capital spending, Mr. Silverblatt said, “but home-run hitters also strike out the most.”

Write to Hannah Miao at hannah.miao@wsj.com