CEOs are less confident about the future than they have been at any previous time since the global financial crisis of 2008, per a new report by Goldman Sachs. This has troubling ramifications for the equity markets and the broader U.S. economy.
After the U.S.-China trade conflict intensified in May, cash outlays by S&P 500 companies in 2Q 2019 dropped by 13% on a year-over-year (YOY) basis, including an 18% plunge in spending on share repurchases. Goldman projects that, for full year 2019, total cash spending by S&P 500 companies will decline by 6%, the sharpest annual drop since 2009, per their current U.S. Weekly Kickstart report.
- S&P 500 CEOs' pessimism is at a post-financial crisis high.
- A large majority of CFOs expect a recession in 2020.
- Cash spending by corporations is plummeting.
- Economic indicators already are weakening.
- Corporate spending cuts will make the downturn worse.
Significance for Investors
Goldman indicates that their observation about rapidly declining CEO confidence is based on a survey conducted by the Conference Board. Meanwhile, they note that CFOs at many of the largest U.S. corporations are also becoming very bearish about the economy, with 53% expecting the U.S. to be in recession by 3Q 2020, and 67% anticipating a recession by the end of 2020, per a survey by Duke University.
Indeed, Goldman finds that U.S. economic growth has slowed sharply in 2019. Their U.S. Current Activity Indicator has registered a 1.7% year-to-date (YTD) increase, versus a 3.6% average rate of increase during the first three quarters of 2018.
Meanwhile, the Conference Board's Index of Leading Economic Indicators has been declining on a YOY basis, and Morgan Stanley calls this "a clear warning of economic contraction," per their current Weekly Warm Up report. They also observe that "pressures on corporate profits have been weighing on business investment and spend for some time and now companies with structural growth tailwinds are starting to see the impact, too."
Pessimism about the economy by CEOs and CFOs can become a self-fulfilling prophecy. If they cut spending, they reduce the incomes of suppliers, employees, and shareholders. A vicious cycle is then likely to ensue, as those suppliers cut their own expenditures, consumer spending declines amid slower wage and job growth, and shareholders have less purchasing power, as share repurchases and dividends either stagnate or decline. Additionally, cutbacks in business investment are likely to impair future corporate profitability.
While authorizations for share repurchases are down by 17% YTD in 2019 versus the same period in 2018, Goldman observes that they are still trending toward the second-highest year on record. Since stock buybacks have been the biggest source of demand for U.S. equities during the current bull market, lower outlays will remove a key prop for stock prices.
In 2020, Goldman projects a modest 2% YOY rebound in S&P 500 cash outlays, to $2.7 trillion. While they expect stock buybacks to fall by 5% to $675 billion, they forecast increases of 3% for capital expenditures (to $745 billion), 6% for R&D (to $380 billion), 6% for cash M&A (to $365 billion), and 5% for dividends (to $535 billion).
Goldman notes that most of the projected increase in capital expenditures will be "maintenance capex" rather than "growth capex," designed to keep operations stable rather than funding expansion. Finally, their projected rise in dividends is roughly equal to their forecasted increase in EPS.