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The New York Stock Exchange on Sept. 6, 2016.Michael Nagle/Bloomberg

The great cash hoard amassed by U.S. corporations has begun to shrink, reducing their means to invest, expand and distribute money to shareholders.

The effects of the "profits recession" are increasingly apparent in the levels of cash on U.S. balance sheets, as well as in declining corporate buybacks.

Cash and equivalents fell to a three-year low in the second quarter, at an average of $860-million (U.S.) among companies in the S&P 500 index, according to Bloomberg. With depleted cash resources, executives at some of the biggest U.S. corporations have become considerably less generous, with buybacks falling sharply in the second quarter. While profits, cash and buybacks all remain high in absolute terms, the recent reversal in direction on all counts potentially weakens the foundation of the bull market.

In recent years, corporations flush with record earnings and access to cheap money have resorted to the share repurchase to an unprecedented degree.

"Stock buybacks have outpaced equity-fund inflows for more than a decade," Tobias Levkovich, Citigroup's chief U.S. equity strategist, said in a note.

Last year, companies in the S&P 500 collectively returned more than 100 per cent of their profits through buybacks, according to New York University finance professor Aswath Damodaran.

"While this would not be surprising in a recession year, where earnings are depressed, it is strikingly high in a good earnings year," he wrote.

This year started much the same way, with earnings returned exceeding 112 per cent in the first half.

But lately, the pace has slowed markedly. In the first seven months of this year, buybacks totalled $376.5-billion, down by 21 per cent from the same period last year, according to TrimTabs Investment Research data.

No small amount of criticism is reserved for the proliferation of share buybacks, which are seen by many as a manoeuvre through which deteriorating earnings can be masked. A reduced outstanding share count provides an automatic boost to earnings-per-share results.

Several politicians, including U.S. Democratic presidential nominee Hillary Clinton, have argued that mass buybacks rob the economy of investment needed for growth in the interest of appeasing activist investors and hedge funds.

The market itself has taken a much more favourable view, however, as indexes with heavy exposure to buybacks have consistently outperformed in recent years.

There are early signs that that, too, may be changing.

"At some point, even as an equity holder, you'd rather see some of that money reinvested," said Michael Greenberg, a portfolio manager at Franklin Templeton.

Last month, Goldman Sachs reported that its buyback basket, which is made up of stocks with the highest buyback yields, has underperformed the broader market in the year to date.

"Investors have rewarded buybacks for many years but the pattern has reversed in 2016," wrote David Kostin, Goldman Sachs' chief U.S. equity strategist.

If that reversal continues, it could signal an appetite by investors for alternative uses for free cash flow.

At the same time, the capacity for buyback activity may have diminished. A high U.S. dollar combined with the crash in oil prices have fuelled the profits recession, which has seen five consecutive quarters of decline.

And borrowing to buy back stock has contributed to the highest debt levels at S&P 500 companies ever – a total of $5.4-billion in the second quarter, on average, according to Bloomberg.

"Those that have been taking on debt to buy back stock are maybe closer to the end of their rope," Mr. Greenberg said.

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