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<< Read: The End Is Near, Part 3: Corporations Are The Ultimate Dumb Money
<< Read: The End Is Near, Part 4: Peak Trophy Asset Inflation
A recent Goldman Sachs report explains where this year’s stock market profits (should there be any) will come from:
Buybacks and Dividends All That’s Left in S&P 500, Goldman Says
(Bloomberg) — The $1 trillion that U.S. companies are on track to return to shareholders this year will constitute the market’s entire return in 2015, according to Goldman Sachs Group Inc.
Dividends and buybacks will be responsible for supporting a market where the median stock in the Standard & Poor’s 500 Index is trading at 18.2 times earnings, putting it in the 99th percentile of historical valuation, the firm said in a note to clients. Goldman Sachs forecasts that the S&P 500 will rise to 2,150 by mid-year before fading to 2,100 by the end of 2015.
S&P 500 stock values “have limited scope for further upward expansion,” a group of Goldman Sachs analysts including Kostin, the firm’s chief U.S. equity strategist, wrote in a May 15 client note. “Dividend yield will be the sole contributor to total return during the next 12 months,” they said.
This would be fine (or at least not outrageous) if corporate cash flows supplied the necessary cash. But they don’t:
U.S. Firms Shoulder Rising Debt
(Wall Street Journal) — U.S. corporate-debt issuance is running at its fastest clip ever in 2015 after three consecutive record years. Borrowing by investors against their stock brokerage accounts has risen to fresh records. And household borrowing has picked up after plunging during the “Great Recession.”
The increased borrowing is a sign that companies and individuals are feeling more confident about taking risks as a strengthening economy makes the debt more manageable, according to experts who say that the level of indebtedness isn’t yet a cause of concern the way that it was before the financial crisis.
Net leverage for highly rated U.S. non-financial companies, a measure that tracks debt less cash as a multiple of annual earnings, was 1.88 times at the end of 2014, according to Morgan Stanley data. That is up from 1.63 times at the end of 2007, on the eve of the financial crisis.
U.S. corporate-debt issuance so far this year has jumped to $609 billion, from $568 billion in the same period last year, according to recent figures from Dealogic.
Junk-rated firms, with ratings double-B-plus or below, are borrowing at an elevated pace, sometimes a warning sign for analysts who track market cycles. But defaults remain low and few analysts expect to see a sharp rise in defaults until the economy falls into recession, something that isn’t widely expected in the coming year.
The trailing 12-month default rate for junk-rated U.S. companies was 1.9% at the end of March, Moody’s Investors Service said, compared with nearly 15% during the financial crisis.
