Written by: David Lebovitz
Since the financial crisis, corporations have shown a preference for repurchasing stock and paying dividends, rather than reinvesting these funds back into the business.
With the newly minted tax policy allowing companies to repatriate foreign earnings, investors have begun to wonder if unlocking the nearly $2.5 trillion of business profits held overseas could spur investment spending, particularly now that capital spending can be fully expensed through 2022.
Investment spending could certainly accelerate in the wake of these changes to the tax law, but this will likely have more to do with the expensing provision, rather than repatriation. History provides limited guidance, but after the 2004 repatriation holiday, buybacks rose while hiring and investment were, for the most part, unchanged. Furthermore, corporate cash balances held in the U.S. have been elevated for the better part of this business cycle, suggesting that if companies had wanted to increase investment spending, they already would have done so.
Investment spending seems to have been kept at bay seemingly due to the lackluster nominal growth outlook that has prevailed for the better part of the expansion.
Although the U.S. economy has been enjoying a late-cycle acceleration over the past few quarters, we believe that growth will decelerate back towards the trend rate of 2% over the course of 2018. Against this backdrop, corporations will likely continue to exhibit a preference for buying back shares and paying dividends, rather than ramping up capital spending. This could delay a revival in productivity, but buybacks should provide a boost to S&P 500 earnings per share of between $6 and $7, moving the annual growth rate into the low double digits for 2018 as a whole. With earnings continuing to grow, the stock market will have fundamental support to move higher; investors should continue leaning into risk as the calendar turns.
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