Below we detail three key themes emerging from management commentary during third quarter US corporate earnings releases1 alongside our thoughts.
Theme 1: The elongated expansion is expected to continue despite elevated uncertainty.
GSAM View: We agree with this view; political uncertainty is elevated but US growth remains positive, underpinned by resilient household consumption which is helping to offset weakness in business investment and trade.
Theme 2: An uncertain business environment will likely result in cautious cash spending in 2020.
GSAM View: While this narrative may hold true in aggregate for corporate America, within the US investment grade market, we observe divergence in cash deployment between A-rated and BBB-rated issuers. BBB-rated companies have been exhibiting greater restraint with respect to spending on dividends, share buybacks and capital expenditure relative to their operating cash flow. Disciplined spending alongside moderating leverage leads us to identify select opportunities in BBB-rated bonds. Interestingly, BBB-rated companies with large debt balances have been the most proactive this past year in reducing debt relative to earnings.
Theme 3: Politics and the 2020 presidential election will be top of mind heading into the New Year.
GSAM View: On the geopolitical front, we expect continued uncertainty, even if near-term US-China relations turn somewhat constructive. With respect to the US presidential election, the investment implications will likely be sector specific given particular policy proposals, including potential drug price legislation and a more restrictive stance towards mergers and acquisitions activity and share buybacks.
Source: Bloomberg, GSAM. Based on data available as of Q3 2019. Series reflect the median US Investment Grade Non-Financial Company (excluding commodities) within each rating cohort and are based on recent ratings and debt outstanding, held constant for the entire measurement period. Large issuers are defined as those with more than $15bn of debt outstanding as of their most recent balance sheet data release. Where possible, we exclude operating leases from our calculation of total debt from Q1 2019 onwards. Earnings before interest, tax, depreciation and amortization (EBITDA).