Corporate Cash Levels Are Starting to Fall

n{(4j2u8fcg3pzzb9j6)[g]9_media_dl_1.png Bloomberg

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(Bloomberg) — The latest earnings period brought what might be an early warning sign about credit quality for high-grade US companies. 

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Cash levels at blue-chip companies are shrinking, when excluding results from the most-cash-rich corporations. Among members of the S&P 500 that have posted results, cash levels for the latest quarter fell nearly 1% compared with the last three months of 2024. That’s according to a Bloomberg News analysis that focuses on non-financial companies with less than $30 billion of cash.   

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The group’s cash holdings, now at $1.14 trillion, have broadly been declining since the third quarter of 2023, when they peaked at $1.21 trillion. While companies are still generally performing well, shrinking cash levels can be a sign of business slowing and profits falling. That’s a particular concern now as escalating trade wars potentially boost the cost of foreign inputs, weigh on profits, and increase inflation.   

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Bond prices for many US companies leave little room for error. Spreads, or risk premiums, on US high-grade corporate debt averaged just 0.85 percentage point on Friday, the tightest level since March. The average level for the last two decades is closer to 1.5 percentage point.  

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“It’s actually a dangerous position to be in,” said Michael Contopoulos, deputy chief investment officer at Richard Bernstein Advisors. “If you bring down cash balances and you find yourself having to deal with higher inflation and higher volatility, your debt is going to get punished.”   

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For the biggest cash generators, the story is different. Giants from Meta Platforms Inc. to Microsoft Corp. and Nvidia Corp. generally posted strong earnings this quarter. The top 12 biggest holders of cash saw their holdings rise about 1.4%, to around $756.7 billion. The dozen companies, which also include companies outside of the technology industry like Johnson & Johnson, each have more than $30 billion of cash and marketable securities on their books, and hold in total about 40% of the S&P 500’s cash.     

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The biggest companies can distort averages, and by some measures many high-grade companies aren’t looking great. Leverage levels, for example, have been better about 80% of the time over the last two decades, a UBS Group AG analysis found.   

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But by other measures companies are still performing well. Investment-grade firms are holding more cash as a share of their assets than they have on average over the past decade, according to data from S&P that analyzed North American companies. It’s likely the behavior that has contributed to the declines in cash — such as boosting share buybacks — has reversed this quarter as companies prepare for a slowdown, Bank of America credit strategist Yuri Seliger said.

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That’s why some money managers are stopping short of saying that it’s time to prepare for the worst. 

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“You still want to be positioned in companies that have the ability to weather a range of scenarios, but at the same time, I don’t think you want to price your entire portfolio to the worst possible outcome,” said Maulik Bhansali, senior portfolio manager at Allspring Global Investments.