Share repurchases have been a crucial backbone for the eight-year bull market.
On several occasions during the period, the US stock market has looked devoid of any positive catalysts, relying heavily on buybacks to keep share prices afloat.
This was never more true than during the S&P 500’s five-quarter earnings contraction from 2015 into 2016, a period that saw the benchmark edge higher by 1.5%, driven largely by companies repurchasing their own stock.
Ultimately, it’s a win-win for corporations to conduct buybacks, because it pushes share prices higher while also signalling to the market that they view their shares as undervalued.
So it’s unwelcome news to equity bulls that buybacks are slowing. Repurchases by S&P 500 companies totaled $US133.1 billion in the first quarter, a 17.5% decrease from a year ago, according to data compiled by S&P Dow Jones Indices. The slowdown is also reflected on a trailing 12-month basis, with buybacks declining 13.8% on a year-over-year basis.
While quarterly buybacks are still higher than they were four years ago, a more tempered pace undoubtedly adds to anxiety in a market that some experts already think is overvalued.
This concern may end up being unwarranted, however, due to what’s historically been the biggest contributor to share gains: profit growth.
Companies in the S&P 500 expanded earnings by 14% in the first quarter, the most since the third quarter of 2011, according to data compiled by Bloomberg. And it’s expected to maintain a strong pace through the rest of the year.
As an extension of that, the number of companies revising future profits higher is outpacing those making downward adjustments by the most since 2012, Morgan Stanley finds. The measure, known as earnings revision breadth, shows just how widespread profit optimism is throughout the S&P 500.
Also encouraging for stock bulls are cash holdings that are at their highest in almost three decades. US stock investors have made a habit out of buying on any sign of weakness for almost the entire duration of the bull market, and the reservoir of capital on the sidelines makes it easy to continue doing so.
And even though companies have recently shown a willingness to back away from the repurchases that have been such a reliable backstop, they too are sitting on mountains of cash — particularly the tech titans so responsible for recent market strength.
So while it’s too early to say if they will need to, one thing is certain: buying back shares is always an option.
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