Markets may lose a key pillar of support just as equities appeared to find their footing after a very rough start to 2022.
Buybacks will be robust this year, but only equate to 0.7% of market cap, near the low-end of the range over the past decade, UBS’s Stuart Kaiser said, in a recent note, cautioning that the corporate bid will decelerate as we approach Q1 earnings season.
Note that buyback authorizations are on track to top 2021’s all-time mark. Gross buybacks should reach $1 trillion this year and on net, corporate equity demand may total a record $700 billion in 2022, according to Goldman.
Read more: ‘Diamond Hands And Buybacks’ To Drive Stock Demand
But that “strong underlying bid for the market” is set for a seasonal slowdown, Kaiser wrote, noting that such periods are typically accompanied by relative underperformance in the S&P Buyback Index.
Of course, that isn’t a reason to turn overtly bearish if you were previously constructive. It’s not as if buyback blackouts are some new phenomenon. UBS was clear on that. “As a stand-alone, easing buybacks are not a reason for concern,” Kaiser wrote.
The figure (below) gives you some context for headlines touting what’s likely to be a record year for repurchases.
Again, that’s not to suggest the corporate bid won’t make a difference or somehow isn’t relevant. It will and it is. But context is always key, and because I talked about the aggregate figures over the weekend, I thought the ratio might be useful.
For UBS’s Kaiser, investors may want to at least consider that “given light positioning and buyback stocks beating the SPX by about 200bps YTD,” the waning impulse into earnings might “open space for tactical downside risk.”
Further, he cautioned that the near 9% rally off recent lows in the S&P “has put a serious dent in short-term risk pricing.” A 21 VIX is “too low given upcoming US data, ongoing headline risk and easing buybacks,” he said.
You recently mentined buybacks as a support for the market. Andrew Ross Sorkin in his Dealbook column for the Times indicated part of the budget bill would freeze corp execs from selling their shares for three years after a buyback. He also mentioned some corps profits benefit substantially from buybacks (up to 50%) This would obviously affect multiples. Also would be interested on any studies youy have seen re effects on eps of non Gaap accounting issues. Seems to me lower quality of earnings has been severely overlooked as a factor in WS research.
Unfortunately, low quality earnings are a fact of life — a fixture, if you will. It’s certainly not the case that Street research overlooks that. They’ve written tomes on it from an index-level perspective and every analyst in every sector assesses earnings quality every quarter. The bottom line, though, is just that earnings ain’t what they used to be. 🙂
Folks in the boardrooms appear to think buybacks are the best use of funds now.
The whole point of buybacks originally was to counter the fact that when stock prices and P/Es were low, a firm’s stock might offer a better effective return than any available CAPEX projects. Buying would stop when prices rose. Now it’s the opposite. Firm’s seem intent on speculating in their own stocks. Since the reason they engage in these shenanigans now is to try to boost EPS, without actually performing better, so executive options will become more valuable. All the while these firms are cutting their equity foundation and with rates rising it will much more expensive to keep the party going, impairing financial flexibility. All this financial engineering is why non-GAAP earnings are so popular. The reason the SEC was created was to put a stop to firms selling “blue sky” securities. I guess everything old is still new again. Liars and thieves are hipper than ever.
Not to mention UVIX(2x levered) likely to start trading.