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Analysis: Investors are aiming for nearly $ 2 trillion in cash to strengthen stocks

NEW YORK, Jul 21 (Reuters) – Investors expect a growing pile of cash at U.S. companies in the coming months to support the stock market as executives announce plans to increase stock buybacks, increase dividends, or pour money back into their businesses.

Keith Lerner, chief marketing strategist at Truist Advisory Services, said S&P 500 company balance sheet cash has soared to a record $ 1.9 trillion, compared to $ 1.5 trillion before the pandemic crisis in early 2020.

The cash hoard is likely to be a key factor in investors’ calculations as the second quarter earnings season is in full swing as market participants gauge how stocks react to concerns about slowing growth and a resurgence of COVID-19 that will secure a rush for safe Ports in US Treasuries triggered the past few days.

Corporate cash holdings are “a nice, subtle form of market support,” said Michael Purves, chief executive officer of Tallbacken Capital Advisors. “With all the over-market talk and aggressive valuations, this offers market support into 2022 and 2023.”

Large amounts of cash give companies the flexibility to take potentially stock backing measures, including facilitating buybacks that increase earnings per share. Companies can also increase dividends, which makes their stocks more attractive to income-oriented investors in the face of falling government bond yields.

A basket of stocks created by Goldman Sachs of companies that give comparatively large amounts of cash back to shareholders through buybacks or dividends had outperformed the S&P 500 by 5% in 2021 by last Thursday. A separate basket of companies with relatively high capital expenditures or research and development costs performed 2% better.

“Lately, investors have been rewarding all uses of cash,” Goldman said in a report last week. The investment bank’s strategists expect buybacks to rise 35% this year.

The focus is on cash as investors seek to read conflicting market signals that have surfaced over the past few weeks.

Although stocks are close to records, government bond yields, which are reversing prices, fell to their lowest level since February this week amid fears that the delta variant of COVID-19 could hamper economic recovery.

The expectation of large corporate spending could encourage investors to buy future price declines, mitigating declines that some believe are overdue. According to Ryan Detrick, chief market strategist at LPL Financial, the S&P 500 has seen an average of three pullbacks of at least 5% per year since 1950, but is yet to see one such decline in 2021.

INCREASING BUYINGBACKS

U.S. companies announced $ 350 billion in buybacks in the second quarter, the largest since the second quarter of 2018, after announcing $ 275 billion in the first quarter, according to EPFR.

Total dividend payouts from the S&P 500 rose 3.6% year over year to $ 123.4 billion in the second quarter, although that amount fell short of record payouts in the first quarter of 2020, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices .

Investors will get more insight into spending plans as more results come in, including reports from Apple (AAPL.O), Amazon (AMZN.O) and Microsoft (MSFT.O) expected next week. Prudential Financial (PRU.N) and AutoNation (AN.N) were among the companies that expanded their buyback programs this week.

Technology and financials have announced their biggest buybacks among the sectors this year, JP Morgan said in a statement this week. Apple alone increased its stock buyback approval by $ 90 billion in April.

Dealmaking is another way companies could use their resources, with Goldman predicting the S&P 500’s cash spend on mergers and acquisitions will increase 45% this year to $ 324 billion.

“Many of these mega-cap companies are making so much money that they can make sizeable acquisitions,” said Charlie Ryan, portfolio manager at Evercore Wealth Management Blatt.

Reporting by Lewis Krauskopf; Editing by Nick Zieminski

Our Standards: The Thomson Reuters Trust Principles.

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