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Healthy Corporate Profit Shares But Political Uncertainty Could Dampen Capex [3/4]

MACRO ANALYSIS
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  • The potential buffer accumulated by businesses whilst they have been running strong net lending balances [see part 2] is reflected nicely by the corporate profit share at historically elevated levels, especially when looking over a multi-decade horizon.
  • Some of the areas these profits could go towards include, i) dividends, ii) share buybacks (seemingly unlikely with the S&P 500 at record highs but the breadth of gains is narrow – see the Russell 2000 in comparison) or iii) re-investment.
  • There are however some potential factors at play that could limit business capex intentions, one of the most prominent being political uncertainty ahead of the presidential election in November and with there even being uncertainty as to who the Democratic candidate will be.
  • Further, relative to GDP, businesses have deleveraged since the early pandemic surge in indebtedness, but their debt to GDP is still historically elevated.

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  • The potential buffer accumulated by businesses whilst they have been running strong net lending balances [see part 2] is reflected nicely by the corporate profit share at historically elevated levels, especially when looking over a multi-decade horizon.
  • Some of the areas these profits could go towards include, i) dividends, ii) share buybacks (seemingly unlikely with the S&P 500 at record highs but the breadth of gains is narrow – see the Russell 2000 in comparison) or iii) re-investment.
  • There are however some potential factors at play that could limit business capex intentions, one of the most prominent being political uncertainty ahead of the presidential election in November and with there even being uncertainty as to who the Democratic candidate will be.
  • Further, relative to GDP, businesses have deleveraged since the early pandemic surge in indebtedness, but their debt to GDP is still historically elevated.