M&A has picked up in the last few years, and that activity is creating a major side effect that could hurt the stock market and broader economy.
right now? For one, it now makes up a record share of total assets for US nonfinancial companies — something Moody's says is inevitable in an age when technological advancement and brand enhancement are key.
Considering equity markets take their cues from drivers like balance-sheet strength — as well as more immediate measures of credit quality like profitability and cash flow — it's possible a major goodwill squeeze could accelerate a broader stock meltdown. At the core of the situation is a potentially lethal double whammy: goodwill is more more vulnerable during market downturns and there's way more goodwill overall in the market right now.
"Asset write-downs or impairments consequently increase in periods of widespread market devaluation when earnings and cash flow expectations deteriorate," Moody's wrote in a recent report."Such write-downs, if more dispersed than in the past, could put further strain on balance sheets in a time of weakness, amplifying the already negative effects of an economic downturn."
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