Oh, what a difference a year makes.
Thanks in no small part to tax cuts and deficit-funded, supply-side fiscal stimulus, 2018 was a record year for S&P 500 cash spending.
In fact, as Goldman writes in an expansive new note, “aggregate spending on capex, R&D, cash acquisitions, dividends, and share repurchases rose by 25% to $2.8 trillion [last year]”. For those keeping score at home, that’s nearly the briskest YoY growth in three decades.
If you’re wondering about the breakdown (i.e., the granulars, as it were), buybacks surged 54% to $833 billion and as Goldman goes on to remind you, “for the first time in the post-crisis period net buybacks and dividends totaled more than 100% of free cash flow”.
And yet, contrary to what you might be inclined to believe if all you did was scan headlines, investment growth was no slouch either. In fact, capex and R&D grew by 14% to a combined $1.1 trillion or nearly 10% of sales last year. “[That’s] the highest share since at least 1990”, Goldman notes.
But, as you can see in the chart, 2019 has been an entirely different story. Cash spending dropped by 4% YoY during H1, and in Q2, it plunged double digits.
It’s not hard to identify the culprit. Take a look, for example, at CEO confidence:
That’s the lowest since the crisis. At the same time, the latest Duke University CFO Global Business Outlook shows more than two-thirds (67%) of CFOs think the country will be in recession by the end of next year.
Depending on which real-time indicator you’re inclined to trust, growth stateside has likely decelerated to just over half of the Trump administration’s 3% “target”. The latest Markit PMIs, for example, suggest the US economy is growing at a pace of just over 1.5%. Goldman’s US Current Activity Indicator has averaged 1.7% YTD, which the bank cautions is “well below the average of 3.6% during the the first 3 quarters of 2018”.
And so, expect corporate management teams to exercise caution in the face of exploding policy uncertainty. If you can’t discern what’s coming next tweet, let alone next week or next month or next year, it is impossible to plan and invest. The chart in the left pane is familiar and the scatterplot on the right gives you some context for how uncertainty has affected spending decisions over the last three decades:
The bottom line, from Goldman, is that with global economic policy uncertainty having “notched its highest reading in at least 20 years”, CEO confidence plunging and earnings growth now set to flatline (at best) buybacks and cash acquisition spending have “collapsed”.
“We expect S&P 500 share repurchases will fall by 15% to $710 billion in 2019”, Goldman says, adding that although “buybacks rose by 4% year/year to $206 billion during 1Q 2019, [they] declined 18% year/year to $161 billion during 2Q”.
Of course, the numbers going forward will still look solid in nominal terms, but Goldman warns that YoY growth will invariably fall considering the impossible comps from last year.
All told, the bank sees total S&P 500 cash spending falling by 6% in 2019, with cash M&A diving 20% and buybacks plunging 15%. Capex should post a meager 1% rise, while R&D spend and dividends are seen growing by 6%.