Slowing Cash Flow Could Mean a `Nasty Surprise' for U.S. Stocks

(Bloomberg) -- Amidst the euphoria over fresh record highs in U.S. stocks, Societe Generale SA is among a few investment firms now highlighting warning signs for investors.

Concerns over a flattening U.S. Treasury yield curve -- a sign to some of a coming economic slowdown -- have quieted down for the moment, thanks to the recent pick-up in longer-dated yields. But the potential slowdown message has an echo in diminishing corporate cash flows, SocGen strategists including Andrew Lapthorne have highlighted.

There’s been a “steady” decline in the growth of net operating cash flow in U.S. stocks, excluding the financial and energy sectors, the French bank’s analysts highlighted in a recent note. (Financials have benefited from rising interest rates, while oil companies have been bolstered by the increase in crude prices.)

The slowdown for the broader group of companies is noteworthy because it’s coincided with both a slump in the dollar and a decline in the yield curve, said the strategists. An inverted yield curve, which will occur if the trend continues, has historically come before economic slumps like the one that started about 10 years ago. And a falling dollar could reflect relatively more positive investor sentiment about economies outside the U.S.

"If the cash-flow growth signal is correct, and that reinforces the yield-curve view" of the U.S. outlook, "then equity markets could be in for a nasty surprise,” according to SocGen.

To contact the reporter on this story: Cormac Mullen in Tokyo at cmullen9@bloomberg.net.

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Colin Simpson

©2018 Bloomberg L.P.