US corporate margin reset

I’ve been highlighting the need for US corps to “reset” margins to make up for the excessively asset-light business models that have come to the fore the past three decades. Has the Great Reset begun? Perhaps. Empirical Research Partners, LLC has a report out today highlighting that Capital Expenditures are up 20% ytd for the S&P 500 vs. earnings that will barely be positive. Is this the beginning of that new spending? We shall see. If so, companies that can afford to invest during the downturn should do so. Those that can’t will continue cost-cutting/hewing to the prior model.

On the capital markets side of the equation, I’m looking for a parallel move towards a more cash-based relationship between investors and companies, reflected in higher payout ratios, and higher dividend yields. These have not yet appeared and may take a decade to do so.

The two assertions–higher spending and higher payouts–might seem at odds, but buybacks–nearly a trillion dollars(last 12 months)–can easily finance both. Now that the bloom is off the buyback rose, the shift to dividends should become evident.