Are investors in denial about how dim the outlook is for American businesses?
That's the question Société Générale's Andrew Lapthorne, global head of quantitative strategy, posed to his bank's clients.
"Asset valuations are extreme; returns are poor, the probability of losses is high and the ability to recover any losses quickly is low," he writes.
In particular, the strategist sounded an alarm over the state of corporate America's balance sheet. Company spending exceeds cash flow by a near-record amount—a fundamentally unsustainable situation—as net debt continues to increase at a rapid pace.
In many cases, companies have used debt to repurchase their own stock, flattering their bottom-line financial performance. While not all buybacks are financed by debt, Lapthorne did note a correlation between net repurchases and the change in corporate indebtedness.
"U.S. corporate balance sheets are a major risk going forward," he says. "U.S. corporates are massively overspending."
