Even amid the trumpeting of an economic recovery and the resurgence of the stock market, companies reporting earnings are showing a strong reticence to part with the cash stowed away in their coffers.
The few companies that have indicated a desire to start spending—think Amazon and Google—have taken their lumps while other companies holding cash and still beating earnings expectations have been rewarded.
That's being seen by some market pros as underlying fear that the economy has not found solid-enough footing to veer from the cautious stand companies have taken since the collapse of the financial system.
"Investors are simply favoring those companies where corporate treasurers understand the importance of liquidity, particularly in a period of declining inflation and in my judgment rising deflationary expectations," said Bob Andres, CIO and wealth strategist for Merion Wealth Partners in Berwyn, Pa. "Maybe they're simply saying cash is king and holding cash is acting responsibly."
Corporations are holding about $1.8 trillion on their balance sheets, money that has swelled as the US has weathered its worst downturn since the Great Depression.
Earnings, though, have blossomed, with some 82 percent of companies beating expectationsfor the second quarter and 68 percent beating on top-line revenue expectations.
Still, the inflow of cash into company operations remains weak.
"We know that cash is building up and companies are definitely positioned. They have ample reserves should weakness re-emerge in the economy," said Mike O'Rourke, chief strategist at BTIG in New York. "There's still a lot of fear out there."
That big lump of cash on America's corporate balance sheet, however, could be problematic for investors using price-to-earnings ratios as their guideline for buying stocks. The P/E of 13 may look attractive, but doesn't tell the whole story about the quality of earnings.
That ratio "might be all this market is worth," said Nicholas Colas, chief market strategist at BNY ConvergEx in New York. Colas cited a slew of reasons why operating earnings are providing a distorted picture of the Standard & Poor's 500, citing "cash hoarding" as one of them.
"If you miss earnings it's a temporary hurt. But if your vault is empty, that can be fatal."
"One well documented corporate reality since the 2008 financial crisis is the propensity of corporate CEOs to hold onto cash, rather than pay dividends or buy back stock," Colas said in a note to clients Wednesday. "And, of course, they are especially reluctant to plan new capital expansions or acquisitions.
"That makes for a very safe balance sheet, but equity valuations are equally predicated on growth and efficient use of capital. High cash balances do little for either," he said.
In other words, you have to spend money to make money, and companies not spending reserves aren't doing anything to grow their businesses.
Regardless, investors have taken a dim view of those few companies that have indicated plans to start deploying cash.
Google reported earnings that on their face appeared solid, but the company's move to hire nearly 1,200 employees in the quarter didn't sit well with Wall Street. Neither did its various other acquisition plans. Investors hammered Google's stock after the earnings report, sending shares down 8 percent in a day though it has since rebounded.
Online retailer Amazon.com also saw investors dump its shares after the company missed earnings estimates and investors feared that the company would struggle because of all the capital it was committing to expansion projects and price wars.
The skittishness, analysts say, comes from concerns that consumers remain weak as unemployment stays stubbornly high. Companies indicating they are spending money rather than shielding against more economic troubles face investor revolt.
"Everybody wants unemployment to improve, they want payrolls to start to turn around," said Sam Stovall, chief market strategist at Standard & Poor's. "They realize without payrolls turning around the risk of a double-dip as well as the potential for a deflationary environment could be possible."
With employment unlikely to improve soon—and the consumer consequently to stay weak—companies are likely to hold onto as much cash as possible for the next several quarters, pros say.
"As long as unemployment stays at current levels, it makes sense from a corporate perspective to build cash levels," Merion Wealth's Andres said. "If you miss earnings it's a temporary hurt. But if your vault is empty, that can be fatal."