Here’s What’s Keeping the Stock Market Up
Most people assume what has kept the market afloat this year after sinking 11% at the start of the year was a mixture of better news out of China, oil prices stabilizing, and indications that the Fed won’t raise rates as much as thought. But the real thing bouying the market could be something else: Stock buybacks.
“Corporate repurchases are the main source of net demand for US stocks,” a team of Goldman Sachs analysts led by David Kostin noted in report out on Friday. Demand stemming from stock buybacks will help push up share prices—boosting the S&P 500 to a flat return of 2100 by the end of 2016 as the markets contend with weak growth and a messy earnings outlook, according to the Goldman analysts.
Stock buybacks, in which companies buy back their own stocks and reduce the number of shares on the market, surged to $561 billion in 2015—a 40% increase from the year earlier and the highest since 2007’s $721 billion. And that figure is expected to rise another 7% for 2016 to $600 billion, according to Goldman Sachs.
Companies may purchase their shares at times when the stock is trading at what looks like a discount, or to make use of cash. And investors like it because buybacks should boost a company’s stock price.
But corporations may also engage in stock buybacks for another reason: to increase the paper figure of their earnings per share—a move that can make it difficult for an unwary investors to determine how much the company’s actual operations have led to real growth.
Which seems to be the case for around a fourth of the S&P 500 companies. The percentage of S&P 500 companies that bought enough shares to shift their earnings per share upward by at least 4% year-0ver-year jumped to 25.8% in the fourth quarter of 2015, and has hovered around that level for the first quarter of 2016, according to Howard Silverblatt, a senior index analyst from the S&P Dow Jones Indicies. According to Goldman, the dollar amount as as of April 18 has reached around $122 billion.
That’s up from 20% to 23% of S&P 500 companies that bought enough shares in the seven quarters ending in Q3 of 2015 to increase their year-over-year earnings per share by at least 4%, according to S&P.
“As price-to-earnings levels have escalated, investors need to review the data, and differentiate between the two, determining the proper multiple to pay for growth (via sales, cost cuttings, and efficiencies) and the proper level for buyback growth,” Silverblatt wrote.
The stock buybacks come at a time when major investors including individuals, foreign investors, and pension funds have been selling off their shares, according to a note from Goldman Sachs, amid market volatility and weak oil prices. The S&P 500 however has gained around 2% year to date.
Both Apple (AAPL) And GE (GE) announced multiyear $50 billion buyback programs in 2015, of which there’s about 60% of 93% to complete respectively, while Walmart Stores (WMT) authorized a $20 billion buyback program, of which there still 88% left to complete. That leaves about $210 billion in unused share buybacks for the future, Goldman Sachs reported.