Every quarter, once the verdict is in on earnings season, Goldman publishes an “S&P 500 Beige Book” documenting key takeaways from earnings calls in an effort to, as the bank puts it, “gain a qualitative perspective” on issues confronting the C-suite.
I won’t pretend these reviews make for an especially compelling read, but at a time of pervasive macro ambiguity, considerable disagreement about where we are in the cycle and questions about corporate debt profiles in an environment of much higher rates, anecdotes from conference calls are worth a mention.
America’s largest corporations succeeded in maintaining hefty margins despite much higher input costs (including labor bills) in the post-pandemic era, and not all of their success was down to so-called “Greedflation.” The terming out of debt in 2020 and 2021 was an important factor too. Not only were big companies able to lock in low borrowing costs, the resultant cash buffers began to throw off meaningful income as the Fed ratcheted up rates.
Of course, not all corporates were created equal in that regard, and even larger companies burned through cash in 2022 to fund spending (rather than borrow and raise the cost of capital). As Goldman reiterated, borrow cost for the S&P 500 rose 62bps over the past year. As the figure shows, that was the biggest YoY increase in almost 20 years.
“In response to higher interest rates, some firms have discussed actively managing their debt profiles to insulate themselves from further increases,” Goldman’s David Kostin and Ben Snider wrote, adding that “market performance this year has reflected concern over companies with high floating rate” whose shares underperformed the Russell 3000 by 13ppt.
Although companies are keen to pay down debt in order keep leverage ratios “healthy,” the money has to come from somewhere. “In order to pay down debt, corporates will either have to use new cash flow, tap into existing cash balances, or divert cash from other uses such as buybacks, dividends, or capex,” Kostin went on. “Cash to assets for the typical S&P 500 stock is low relative to recent history, indicating that companies will likely need to divert cash from other uses.”
The two other big themes from earnings calls were consumer spending and, of course, A.I. On the former, management teams generally said the consumer is “resilient” even as high prices continue to weigh on psychology (and wallets). On the latter… well, I’ll just let Goldman tell you. To wit, from Kostin and Snider:
Although AI continues to be a hot topic on earnings calls, the proportion of companies discussing AI fell from its high in 2Q, signaling a potential inflection in enthusiasm over the technology. Companies investing heavily in becoming leaders within the AI space discussed the spending implications of these investments, noting that they expect capex and R&D to increase. Our economists estimate that AI investment could grow rapidly in the next couple of years, approaching $100 billion in the US by 2025.
