Goldman Predicts the Future and There’s a Boatload of Money In It

Goldman is out with a research note, of the crystal ball varietal–predicting US corporations will spend upwards of $2 trillion next year. They even bothered to tell us exactly how it might play out.

BEHOLD.

1. Capital expenditure, research and development
Goldman is calling for $650 billion in capex and $256 billion in R&D spending, reflecting growth of 1 percent and 5 percent respectively. The firm points out that the energy sector accounts for 30 percent of S&P 500 capex, which means “lower for longer” oil prices are weighing on capital spending. “Our forecast of a roughly $50 per barrel Brent crude price in 2016 and recently slashed spending budgets by both Chevron and Exxon suggest a further decline of 20 percent in energy capex during 2016,” the team says in the note. R&D is a different story, however, with energy only accounting for 2 percent of total S&P 500 R&D spending.

2. Mergers and acquisitions
After a blockbuster 2015, Goldman expects cash M&A spending to come in at $300 billion in 2016, that’s an 8 percent increase but still lower than previous growth rates. “The pace of growth in S&P 500 cash M&A spending will decelerate in 2016 relative to the 50 percent surge experienced in 2015. Although two months of the year still remain, cash M&A has totaled $191 billion year-to-date, higher than the 2014 full-year total of $185 billion. Healthcare accounted for almost 50 percent of cash deal activity this year. We expect cash M&A during the second half will decelerate considerably relative to activity in the first half,” Kostin and team say.

3. Buybacks, buybacks and more buybacks
Goldman says companies will spend $608 billion on buybacks in 2016 even in the face of increasing valuations. “Despite weak activity during the first half of 2015, buyback activity will remain robust. Following 9 percent growth in 2014 and an estimated 10 percent growth in 2015, we expect S&P 500 gross buybacks will rise by another 7 percent to $608 billion in 2016. More than 80 percent of S&P 500 firms engage in share repurchases, roughly double the number of firms buying back stock 20 years ago.”

4. Dividends for everyone
Led by financials and tech, Goldman expects dividends to increase 7 percent to $432 billion. “Consensus forecasts imply that the financials sector will grow dividends by 10 percent in 2016, the highest growth rate of any sector, while energy dividends are expected to come under pressure. Slowing global growth has weighed on long-term dividend prospects,” the note says.
Goldman has some recommendations for investors seeking to capitalize on its spending predictions. Even though the bank has vocally opposed hefty buybacks, the analysts recommend investors buy firms that have high total cash returns relative to those investing in growth, as the former group is typically rewarded by markets.

There’s no debating: US corporations are flush with cash and have no idea how to spend it. Typically, they cavort on the golf course and smoke cigars with their mates, then order their underlings to buy back billions of dollars in share repurchases, whilst “cutting the fat” by firing people and reducing “overhead”.

Good shit.