According to Bloomberg, of the 344 S&P 500 companies that have reported fourth quarter earnings through last week, 76% have beaten analysts’ estimates. These beats come on the back of lowered company guidance and significant financial engineering in the form of share buybacks. Earnings growth of 10% year/year came on sales growth of just 1%. With many companies having already cut costs significantly over the past four years, the likely reason for the near double digit earnings growth is share repurchase activity. For example, Apple announced on Friday that it has repurchased $14B worth of its shares in the last two weeks. This follows similar actions from other companies. The chart below details share repurchases buyback activity from S&P 500 companies over the last 14 years. With top-line revenue growing slowly and share repurchase activity increasing, leverage is also rising, which is a credit negative for bondholders. This is why we have become more cautious on the corporate sector in favor of sectors with a more favorable risk/reward profile, such as taxable municipals and short duration agency mortgage-backed securities.