'Cliff' Hanger: Corporate America Puts Everything on Hold
Company executives are postponing decisions such as hiring and plant-building until they can get some clarity from Washington on the looming “fiscal cliff” and possible higher taxes, according to an analysis of earnings conference calls by Goldman Sachs.
“Regulatory direction and political uncertainty remain key concerns to corporate leaders,” wrote David Kostin, a Goldman strategist, in the note. “Firms expressed a uniform desire for regulatory clarity.”
After rallying since early June, stocks have stalled recently as companies gave little, if any, guidance on conference calls following their second-quarter earnings reports.
In particular, Goldman highlighted these comments from executives at UPS , the biggest delivery company in the country and the world:
“In the US, uncertainty stemming from this year’s electionsand thelooming fiscal cliff constrains the ability of businesses to make important decisions, such as: hiring new employees, making capital investments, and restocking inventories. This will further restrict economic growth.”
The so-called fiscal cliff refers to the expiration at the end of 2012 of several tax cuts enacted under President Bush and mandatory spending cuts resulting from the debt ceiling fight last summer.
“One of the confounding factors in terms of the idea of introducing a dividend is if what I’m reading in the press is accurate and nothing changes in the tax structure next year, the potential marginal tax rate on dividends could be 45%,” said an executive from LaboratoryCorp. of America on its conference call, according to the Goldman note. “And so that, in my view, really takes away from the attractiveness of a dividend.”
The increase in partisan rhetoric surrounding the presidential race is putting the fiscal cliff worry at the forefront of executive’s minds as they believe it raises the chances that a bitter Congress does nothing before the end of the year, no matter who wins.
“So for the remainder of 2012, unfortunately all eyes are still going to be on politics and the economy,” said Larry Fink, CEO of Blackrock, on the earnings call for the largest U.S. asset manager. “We have elections in November followed by the impending fiscal cliff and the sequester. This will likely create additional uncertainty and lead to more soft business sentiment and probably a reduction in consumer spending.”
Just 10 percent of Americans approve of the job Congress is doing, according to the latest poll by Gallup. That’s the lowest point in the 38-year history of the measure.
“The fiscal cliff remains a deeply worrisome factor, especially for 2013 EPS and markets,” wrote Tobias Levkovich, chief U.S. equity strategist at Citigroup, in a report to clients this week. “The potential for a combined near 4 percent fiscal drag from higher taxes and spending cuts at the beginning of 2013 if no arrangement can be made (most likely after the November elections) is appropriately being viewed as a major source of economic and equity market discord.”
To be sure, the lame duck Congress could kick the can down the road after November and extended the tax cuts and spending into 2013. Still, that would just mean more uncertainty on earnings conference calls and further inaction by companies for another 12 months.
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