In the US, the earnings season is coming to an end with 400 of the S&P500 companies having already published their results. It's time to take stock. As always, and despite the maturity of the business cycle on the other side of the Atlantic, American companies largely beat the consensus: turnover exceeded expectations in 78% of cases and the rate of positive surprises exceeded expectations in 80% of cases.
However, the interpretation of these results proves to be tricky mainly due to the tax reform which interferes in reading the data from an accounting point of view. Furthermore, the reform has had a negative impact on the balance sheets of many companies. In fact, the announced tax cuts were partly offset by the cancellation of some tax credits, thus forcing many companies to make provisions. Incidentally, many have already accounted for tax on foreign profits that will be repatriated early this year.
Technicalities aside, the tax reform has caused analysts to heavily revise their estimates for 2018 upwards, taking the ratio of upward revisions to downward revisions to an all-time high. Above all, it raises a fundamental question: between tax savings and the repatriation of profits, companies will have a huge financial buffer. What to do with it? There are four possibilities: salary increases, redistribution to shareholders, improved balance sheets (debt repayment) and investments. While there have been wage increases for the most part, uncertainty remains on the other points.
Returning to shareholders, particularly through buybacks, has long been a priority. While conceivable, other redistributions of profits may not be massive. Some companies have announced their intention to invest more in the United States, such as ExxonMobil, JP Morgan or Apple, which intends to open a second campus. The latter, moreover, has declared that it is not inclined to pay an extraordinary dividend but intends rather to redeem a significant portion of its bond debt (100 billion USD). Other companies may also prefer this solution.
Corporate communication is still unclear. If confidence can be seen in management speeches, concrete announcements are quite rare. And it is perhaps this prudence that explains the risks of overheating induced by the introduction of a fiscal stimulus plan in an economy at the peak of the cycle. With the effects of the announcements now behind us, it seems that American business leaders will have to wait.
