By Lewis Krauskopf

NEW YORK, (Reuters) – As the U.S. stock markets end a difficult first quarter, investors look at the next months. High cash levels in companies are one possible boost, as executive deploy resources to buybacks, dividends and deals.

Although the index suffered its first quarter-to-quarter loss since the outbreak of the pandemic in 2001, it recovered in March to reduce the year-to date decline to about 5.5%, down from 12.5% at the quarter’s lowest point.

Stocks are still at risk from rising interest rates, which the Federal Reserve is tightening monetary policy and by increasing inflation and uncertainty about the conflict in Ukraine. Investors may feel less anxious if companies are able to use cash.

“While cash levels are off the highs from last year, they are still well above the pandemic levels and remain supportive for buybacks, dividends and M&A, which are all shareholder friendly activities,” said Keith Lerner, co-chief investment officer at Truist Advisory Services.

Company plans to deploy their cash could become more clear in the coming weeks as they report first-quarter results, which are expected to show a 6.4% increase in S&P 500 company profits, according to Refinitiv IBES.

According to strategists, cash levels rose because companies were more cautious during the pandemic. However, corporate cash flow margins are increasing in the last decade.

Since peaking at just over $2 trillion in early 2021, cash on S&P 500 company balance sheets has dipped to about $1.9 trillion, according to Truist. However, it is still well over $1.5 trillion, which was the level at the beginning of 2019, before the pandemic.

“Cash levels, whether it’s cash on balance sheets or even the ability of companies to tap capital markets if necessary, remain very robust,” said Patrick Palfrey, a senior equity strategist at Credit Suisse (SIX:).

Credit Suisse strategists recently stated that “both buybacks, as well dividends will increase in the next 12-24 month,” which would lead to an increase in share prices and EPS.

S&P 500 company share buybacks came in at $881.7 billion in 2021, a record amount and up nearly 70% from 2020, according to S&P Dow Jones Indices.

TrimTabs reported that the amount of buybacks announced this year is higher than it was last year. $298.9Billion had been announced as of March 29. This compares to $269.8Billion at that time a year ago.

Goldman Sachs (NYSE 🙂 predicts that corporate investors will make up the majority of equity demand by 2022. The bank this month raised its 2022 S&P 500 forecast for buybacks to $1 trillion.

Goldman recently stated that strong corporate demand will be supported by high cash balances and solid EPS gains.

Michael Arone is chief investment strategist for State Street Global Advisors (NYSE:) He said that he was unsure if buybacks will be large enough to prevent a bear or fuel huge gains in stock markets.

“However, it’s a nice steady tailwind to share prices if in fact share buybacks continue to be on pace for a record,” Arone said. “It certainly helps, it’s a positive.”

The U.S. President Joe Biden announced Monday his 2023 budget plan. It targeted buybacks and sought to dissuade corporations from using their profits to purchase stocks for executive benefit.

According to Refinitiv deals Intelligence, US mergers and acquisitions amounted to $2.5 trillion in the last year. This is the highest annual total since 1980 when records started.

So far U.S. M&A has slowed versus last year, with activity down 20% to $516.8 billion from the same period a year ago, according to Deals Intelligence. Investors are eager to see if companies increase their pace.

When it comes to use of cash, “M&A and buybacks are more volatile and they both signal a certain element of corporate executive confidence,” Arone said. “Both are coming off record highs, so if that trend continues that should be a good sign for the markets.”

Some market observers were cautious in overstating the effect large cash positions can have on markets.

This week, however, worries about the economy were rekindled when an area of the U.S. Treasury yield curvature inverted. This has been historically a sign of a coming recession. Some believe that this signal may make businesses more careful about how they deploy cash.

Although having cash in reserve could make it easier for companies to survive an economic downturn, stock drops might be lessened, according to Sameer Samana (senior global market strategist). Wells Fargo Investment Institute.

“More companies might make it through the next downturn but that doesn’t mean you couldn’t have a big pullback in stocks during the next downturn,” Samana said.