NEW YORK (
) -- Judging by the political rhetoric that's just starting to ramp up ahead of November's presidential election, everyone seems to be in agreement that the middle class is still worried about the economy.
Turns out, Mom and Pop Main Street aren't alone. Corporate America is getting jittery as well, according to UBS, which points to a drop in buybacks to $55 billion in the second quarter from $95 billion in the first quarter and a slowdown in M&A activity as two signs that companies are embracing balance sheet conservatism at the moment. The firm is expecting to see more evidence of the trend as second-quarter reporting season heats up.
"Throughout the recovery, U.S. companies have cut expenses, hoarded cash, and deleveraged balance sheets. Given continued uncertainty on the macro front, we believe that CEOs and CFOs will remain conservative, resulting in upward pressure on margins, continued balance sheet strength, and less cash being returned to shareholders," wrote strategist Jonathan Golub in commentary on Monday. "Further, below-trend reinvestment rates should provide a headwind for longer-term growth. This cautious mindset is also consistent with our call for modest 2Q earnings beats accompanied by tepid guidance"
UBS notes 2012 is on pace for a total of 137 deals worth $1 billion-plus, based on a current run rate of 67 transactions as of June 28. That's down from 147 in 2011 and 164 in 2010. According to the firm's data, S&P 500 companies, excluding the financials, had roughly 11% of their total assets in cash as of the end of the first quarter, a level that is near record highs.
Operating under the "cash is king" doctrine does have its benefits, said UBS, which doesn't expect the situation to change in the near term, given the stall in domestic job growth, Europe's recession/debt crisis/political quagmire and the mounting nervousness about Asia.
"On the positive side, the reluctance to deploy capital and increase expenses has led to rising corporate profitability, with operating margins still above prior peaks," Golub wrote. "Given global growth concerns and elevated macro uncertainties, we see no reason for corporate management to loosen the purse strings anytime soon."
While companies turning parsimonious isn't in and of itself a terrible sign for the stock market, it's also not encouraging for those expecting the United States to pick up the rest of the world's slack in terms of economic growth. After all, if corporations are reluctant to buy their own stock or make a play for their competitors, why should retail investors add to their equity exposure?