Corporate America cuts operating expenses to keep profits flowing

Corporate America is slimming down to keep profits flowing.

The big picture: U.S. companies with investment-grade credit ratings reduced operating expenses by 5.3% in the first quarter to $2.86 trillion, according to an S&P Global Market Intelligence report released Tuesday.

Why it matters: S&P's findings indicate that many companies are cutting costs around the edges on things like hiring and business travel, rather than executing wholesale layoffs or deep operational cuts.

• It also comes at a sensitive time, with the jury still out on whether the Federal Reserve's aggressive tightening campaign will lead the economy into recession, or a soft landing.

The intrigue: Businesses with weaker balance sheets didn't cut as much, possibly because they don't have as much fat to trim.

• Companies with noninvestment-grade credit ratings shed only 3.8% of their operating expenses.

Yes but: The energy and consumer discretionary sectors were especially aggressive in slashing costs, having reduced expenses by 13% and 10%, respectively, S&P reported.

• Companies ranging from Disney to FedEx and Dell have initiated cost cuts in recent months by some combination of shedding employees. They've also ended certain operations and reduced spending broadly.
• In some cases, expense reductions reflect passive changes, such as a decline in energy expenses.

But, but, but: Operating expenses still grew as a percentage of revenue for investment-grade companies, rising 0.8 percentage points to 91.4%, S&P found.

• That means that companies didn't entirely counterbalance a slide in business with more reductions.

💭 Our thought bubble: Continued strength in the job market — despite the slowing pace of job growth — suggests that companies are still hesitant to cut too much.