Forget Apple, Goldman Says, Flagging New $1 Trillion for S&P 500
Comment of the Day

August 06 2018

Commentary by Eoin Treacy

Forget Apple, Goldman Says, Flagging New $1 Trillion for S&P 500

This article by Lu Wang for Bloomberg may be of interest to subscribers. Here is a section:

Investors fixated on one 13-digit milestone last week, Apple Inc.’s value. But another trillion-dollar threshold is in sight and is more relevant to the bull market in U.S. equities, says Goldman Sachs Group Inc.

It’s the volume of stock buybacks that corporate America is likely to announce this year. The total for S&P 500 firms will jump 46 percent from 2017 to an annual record, according to an increased estimate from the Goldman unit that executes share repurchases for clients.

The new forecast highlights accelerating demand from companies, a sign that any weakness in stocks is likely to be met with unbridled corporate buying. While August has been one of scariest months of the year for equities in the past decade, it’s also the busiest in terms of buybacks, accounting for 13 percent of the annual total.

Now, with more than 80 percent of S&P 500 members done with quarterly financial reporting, most companies can boost discretionary buybacks, concluding a blackout period that typically restricts share repurchases.

“Investors should focus on a different $1 trillion number that will have a key influence on the market: total buyback authorizations,” strategists led by David Kostin wrote in a note Friday. “It’s not the size of the company but the use of the cash that matters.”

Eoin Treacy's view

Buybacks have been one of the primary avenues through which monetary largesse influenced the stock market since the dawn of quantitative easing. Central banks dropped interest rates, companies took the opportunity to boost debt sales and used the proceeds to buy back shares which lowered the weighted average cost of capital.

With the transition from monetary to fiscal stimulus in the USA, companies are using the windfall from lower corporate taxes to boost buybacks once more. The difference on this occasion is that prices are a lot higher than they were back in 2008 so the absolute dollar figure for buybacks needs to continue to rise if it is to continue to have the same influence.

This graphic highlights the fact 2018 is going to be a banner year for buybacks and helps to rationalise why Wall Street has been so steady against a background of rising geopolitical volatility. However the underperformance of the buyback achievers ETF which is compromised of companies that have bought back 5% of more of their free float in the last 12 months highlights how much money is required to move the needle at elevated prices. 
Both the Nasdaq and Russell 2000 have already broken upwards and the S&P500 is a whisker away from setting a new record. It is being supported by widening breadth with a return to performance by the consumer staples and pharmaceuticals sector. This performance suggests that while buybacks are important they are far from the only reason markets are rallying.

The S&P500 Banks Index rallied over the last couple of weeks to break out of its four-month range which is an impressive performance relative to its international peers.

The performance of Wall Street and the strength of the US Dollar highlight the tailwind the USA continues to enjoy from tax cuts and continued economic expansion. It won’t last forever but it is looking increasingly likely that the medium-term correction that began in January is being resolved on the upside. 

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