The cycle of sustained margin expansion for U.S. companies ended in 2021, thus far only compensating for the failure of 2022.
Free cash flow represents the financial resources remaining with a company after meeting capital expenditures and fulfilling operational requirements with counterparties and employees. It is calculated as operating cash flow minus capital expenditures. Where can free cash flow be directed?
Directions for Free Cash Flow Allocation
Essentially, in three directions:
- Improving financial strength (such as paying down debt or accumulating long-term investments or cash positions).
- Shareholder policy (including spending on dividends or share repurchases).
- Strategic expansion, such as capturing competitors through M&A transactions.
Analysis of Free Cash Flow Trends
The free cash flow of leading U.S. non-financial companies was $1.45 trillion in 2023, compared to the previous record of $1.36 trillion in 2021, according to proprietary calculations based on companies' public filings.
Over the two years, growth was just 6.3% at par (11% y/y) and 6.1% (6.9% y/y) excluding technology companies. Compared to 2019, growth will be 44% and 38%, respectively.
The technology sector directly generates exactly one-third of the free cash flow from all US non-financial companies, so FCF will grow by 18.4% y/y in Q4 2023, but only by +2% compared to Q4 2021.
Conclusion
What does all this mean? There is no qualitative improvement in financial performance in the US, not even in the "success stories" segment of the technology sector. A reasonably quiet 2023 in terms of financial and economic turmoil managed to offset the failure of 2022 but did not pull ahead. There were two phases of financial expansion: from 2017 to 2019 (+35%) and from Q2 2020 to Q4 2021 (another almost +35%), meaning that in this period, market capitalization growth could be justified by financial expansion, but not in 2023 - 2024, where it was formally at zero compared to the previous high of 2021.