Wall St Week Ahead ‘Robust’ Corporate Cash Could Support Stocks After Tough Quarter

A trader works on the floor of the New York Stock Exchange (NYSE) in Manhattan, New York, U.S., March 7, 2022. REUTERS/Andrew Kelly

NEW YORK, April 1 (Reuters) – As the U.S. stock market ends a turbulent first quarter, investors are looking at what could support stocks in the months ahead – with high levels of cash at companies, a hit potential boost as executives deploy resources for share buybacks, dividends or transactions.

The S&P 500 posted its first quarterly loss since the start of the pandemic, although it rebounded in March, reducing the benchmark’s year-to-date decline to around 5% from 12.5%. % at the lowest of the quarter. Read more

The outlook for equities is still threatened by rising interest rates as the Federal Reserve tightens monetary policy, as well as soaring inflation and uncertainty surrounding the war in Ukraine. The ability of companies to deploy cash could help soothe investors from some of this unease.

“While cash levels are below last year’s highs, they are still well above pandemic levels and remain supportive of buyouts, dividends and mergers and acquisitions, all of which are shareholder-friendly activities.” said Keith Lerner, co-chief investment officer at Truist Advisory. Services.

According to Refinitiv IBES, the company’s plans to deploy its cash may become clearer in the coming weeks as it reports its first quarter results, which are expected to show a 6.4% increase in company profits. S&P500.

Cash levels have risen as companies have been cautious about spending during the pandemic, while corporate cash margins have increased over the past decade, strategists said.

Since peaking at just over $2 trillion in early 2021, cash on balance sheets of S&P 500 companies has fallen to around $1.9 trillion, according to Truist. But that remains well above $1.5 trillion, where it stood at the end of 2019 before the pandemic.

“Cash levels, whether it’s liquidity on the balance sheet or even companies’ ability to tap into capital markets if needed, remain very robust,” said Patrick Palfrey, senior equity strategist at Credit Suisse.

In a recent report titled “The Bull Case for Equities,” Credit Suisse strategists said they would “expect redemptions and dividends to rise over the next 12 to 24 months, an increase in EPS and stock prices”.

Share buybacks by S&P 500 companies totaled $881.7 billion in 2021, a record amount and up nearly 70% from 2020, according to the S&P Dow Jones Indices.

The amount of buybacks announced this year exceeded last year, according to TrimTabs, with $298.9 billion announced as of March 29, up from $269.8 billion at that time a year ago.

Goldman Sachs expects companies to be the main source of demand for equities in 2022. The bank this month raised its forecast for S&P 500 buybacks for 2022 to $1 trillion.

“Elevated cash balances and solid EPS growth will support robust business demand this year,” Goldman said in a recent report.

Michael Arone, chief investment strategist at State Street Global Advisors, said he doubted the buybacks were “big enough to stave off a bear market or fuel more big gains in the stock market.”

“However, it’s a good stable tailwind for stock prices if, in fact, stock buybacks continue to be at a record pace,” Arone said. “It certainly helps, it’s positive.”

US President Joe Biden’s 2023 budget plan, announced on Monday, targeted buyouts, seeking to discourage companies from using their profits to buy back shares for the benefit of executives. Read more

U.S. mergers and acquisitions totaled $2.5 trillion last year, the largest full-year span since records began in 1980, according to Refinitiv Deals Intelligence.

So far, mergers and acquisitions in the United States have slowed compared to a year ago, with activity down 20% to $516.8 billion from the same period a year ago, according to Deals Intelligence. Investors will be eager to see if companies pick up the pace.

When it comes to the use of cash, “mergers and acquisitions and buyouts are more volatile, and they both signal some element of confidence from business executives,” Arone said. “Both are at all-time highs, so if this trend continues, that should be a good sign for the markets.”

Some market watchers feared overstating the impact large cash positions could have on the market.

For example, worries about economic growth resurfaced this week when a closely watched part of the US Treasury yield curve inverted, which has always been a reliable signal of an impending recession. Indeed, this signal could make companies more cautious about deploying cash, some said. Read more

While having more cash may help more companies survive an economic downturn, it may not significantly stem the decline in stocks, said Sameer Samana, senior global market strategist at the Wells Fargo Investment Institute.

“More companies could ride through the next downturn, but that doesn’t mean you couldn’t have a big pullback in stocks in the next downturn,” Samana said.

Reporting by Lewis Krauskopf; edited by Megan Davies and David Gregorio

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