So the US earnings season came and went with results coming in around expectations. That masks the true picture due to analysts’ expectations being cut dramatically since year end, and hides the real slump in profits that corporate America is facing. As a result companies have pulled back on buying their own stock by 38% over the last four months, by only buying $244bn, the biggest decline since 2009, according to a report by Birinyi Associates and Bloomberg.
It would appear that executives have begun to tighten corporate belts in an effort to preserve cash due to the uncertain economic outlook. Corporate America has been by far the largest buyer of US stocks over the last five years and a withdrawal of that support could signal the end of the current bull market especially as valuations are sitting at 14-year highs.
Dividends have also been slashed; the highest number of corporates cutting dividends in seven years comes at a time when other sources of demand for stocks are waning. Wealthy individuals and hedge funds have been net sellers for 15 weeks into 6th May, a record period for the current bull market according to a report from Bank of America Corp.
We have long argued that the repurchasing of stock to the high degree we have seen is not constructive for the competitive future of corporate America. But we wait to see if the pull back is due to the rather lacklustre start to the year, capital spending dropped 5.9% in Q1, the most since 2009, or indeed if something more meaningful is on the agenda.