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Corporate earnings have more than recovered from pandemic-era lows.

Many on Wall Street worry that stocks are bound to fall meaningfully in the short-term. But one factor counters that gloomy narrative: cash returns to shareholders. 

Most market analysts see the S&P 500 tumbling through the end of the year. Some are calling for a correction, given that valuations are high, especially if bonds yields resume climbing. Many highlight a potential increase in corporate taxes or continued supply-chain problems as notable risks to earnings, the fuel behind gains in stock prices. 

Yet the picture isn’t entirely bleak. While net income for companies has more than recovered from pandemic-era lows, cash returns haven’t kept pace.

Net income has been up more than 20% year over year in the past four quarters, while the amount of capital companies have paid out in dividends and share buybacks has declined a bit, falling below the year-earlier totals, according to Credit Suisse data. In the past year to date,

S&P 500

companies have generated almost $1.6 trillion in net income, but have only returned roughly $900 billion to stockholders.

The latter represents a slim improvement from the total for the 12 months leading into the depths of the 2020 pandemic. That makes sense: Companies have been hanging onto cash to give themselves a margin of safety given the uncertain economic environment. 

This dynamic has left payouts to shareholders at a low percentage of company valuations, suggesting management teams are likely to up those returns soon.

The S&P 500 buyback yield—the percentage of the index’s total market capitalization represented by buybacks—has recently been hovering at around 0.5%, according to RBC strategists. That is up from roughly 0.3% in early 2020, but still below the pre-pandemic level of just under 1%. The index’s dividend yield is in the same boat, recently seen at just under 1.5%, down from a prepandemic level near 2%. 

One caveat to hopes for larger buyback programs: House Democrats proposed Monday to place a small tax on corporations for stock repurchases

Still, Jonathan Golub, chief U.S. equity strategist at Credit Suisse, writes, “We expect this corporate frugality to reverse over the next 1-2 years, supporting higher stock prices.” 

Already, companies are beginning to unveil larger buyback programs. New buyback announcements from Russell 1000 companies in the past 12 months have totaled more than 300, according to RBC. That is up from a trailing 12-month total of close to 200 reached in the first half of 2020. It brings the level close to those seen just before Covid-19 derailed the economy, though the figures were substantially higher in 2019.

Cash from the buyouts announced so far will continue to flow into the market in coming months. Expect even more as more companies share their ample profits with stockholders.

Write to editors@barrons.com

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