Heard on the Street: 5 things we’ve learned from Corporate America

Corporate America is signaling good things ahead, defying the challenges:

• What recession? Big “worries” have faded
• Show me the money: Shareholders are reaping more rewards
• Capex comeback: Companies have big spending plans
• Watch your step: Not all are created equal
• Why it all matters: Earnings power long-term returns

What recession? Big “worries” have faded

Companies are having a much better earnings season than expected. Despite Street estimates for paltry profit growth just a few weeks ago, analysts now see S&P 500 companies growing earnings by more than 5% year-over-year. This marks a third consecutive quarter of growth, putting the angst of prior years in the rearview. When 2024 is all said and done, the year is expected to boost profits by 10%.

This acceleration comes as C-suites seem less and less worried about the macro headwinds. Back in 2022, roughly 90% of S&P 500 companies cited “inflation” in their earnings conference calls. This season, just over half have made mention. With those frustrations fading, firms are also now refocusing on growth and innovation: Callouts of “AI & machine learning” have risen from about 15% of companies to 40%. That’s symbolic of both a better macro backdrop and a broadening belief in the power of transformative technologies.

Show me the money: Shareholders are reaping more rewards

With companies feeling good, they’re indulging in a shopping spree. Firms can do a lot of stuff with their extra cash—they can pay down debt, seek out strategic investments (both inside and outside of their businesses), and return it back into the pockets of shareholders.

That last point has been one of the hidden gems of the Q1 season. More companies are buying back their stocks this quarter, and at a quicker pace. This, in turn, redivides the “profit pie” into fewer slices, offering more value to existing investors. Again, big tech companies are leading the charge: Apple’s $110 billion buyback announcement last week was the largest for any U.S. company ever, and, for context, if that buyback were its own company, it would be larger than the market caps of roughly 420 S&P 500 stocks.

But it’s not only tech. According to our Investment Bank, S&P 500 companies have broadly announced over $350 billion in buybacks so far this year. A number of key Street players think that figure could rise above $900 billion for all of 2024, up more than 10% over 2023.

Firms are returning value in more obvious ways, too. Meta and Alphabet announced their first-ever dividends this year, with five of the Magnificent 7 now paying one.

Capex comeback: More companies have big spending plans

Speaking of spending, more firms are also ramping up capital expenditures (capex, for short). By reinvesting back into their own businesses, that’s a bid for boosting future profit potential.

So far, S&P 500 capex is tracking at an above 7% pace in Q1 versus the prior year, up from just over 4% in Q4. Big AI investments from big tech have been one of the biggest drivers. Amazon, Microsoft, Alphabet and Meta are expected to spend roughly $200 billion on capex in the next 12 months.

But again, it’s a broader story. Looking at Business Roundtable’s CEO survey, almost 40% of CEOs expect higher capex over the next six months—that’s the highest since Q4 2022 and notably up from 32% last quarter. The even better news: Optimistic expectations have a good track record of translating to real spending.