Investors Are Looking to Share Buybacks to Keep US Stock Market Afloat

Economic

Stocks

Summary:

Stocks started 2024 with a limp. But that could change this week as earnings season kicks off and companies start announcing their plans for share repurchases, something investors hope will help the market keep last year's rally running.

Bulls may need the support, as hedge funds and retail investors are tilted defensively following the strong end to the year, with worries around the timing of the Federal Reserve's (Fed) rate cuts adding to the caution.

"I'm bullish on stocks in 2024, but it's going to be a wild ride in the coming months since institutions are bearish," said Brian Reynolds, chief market strategist at Reynolds Strategy, who correctly called the bear market during the 2008 global financial crisis. "Once the selling runs its course, companies will buy back their shares to push stocks back up."

US corporations have been reluctant to repurchase their shares as the Fed pushed interest rates higher to fight inflation, which raised borrowing costs. Buybacks have fallen for five straight quarters after hitting a record in 2022, according to Bloomberg Intelligence. But with the Fed potentially getting ready to cut rates and earnings growth forecast to improve, investors expect more companies to deploy their newly available capital in the stock market.

The fate of the stock market doesn't rest entirely on buybacks, however at nearly a trillion dollars a year, they represent one of the biggest buying forces around. S&P 500 companies spent nearly US$800 billion (RM3.72 trillion) on buybacks in the past year, down almost 20% from the same period the year before, according to data compiled by Bloomberg.

S&P 500 firms are expected to spend at least US$840 billion toward buybacks in 2024, according to preliminary data from S&P Dow Jones Indices, which uses a different methodology than Bloomberg. The 12-month expenditure through September of US$787 billion was down nearly 20% from a year prior, S&P Dow Jones Indices said. The record was US$923 billion in 2022.

Overall, total corporate buybacks fell 18% in the third quarter compared with the year prior, according to Wendy Soong, a senior analyst at Bloomberg Intelligence. More than 40 S&P 500 companies announced buybacks in the fourth quarter worth a total of US$163 billion, nearly a third less than a year ago in dollar value.

Those companies include Cigna Group and Adobe Inc, both of which have cash on hand after planned corporate takeovers collapsed.

Market timing

The tricky part in all this for executives and investors will be finding the right time — both when to buy back the shares and when to expect them to pop. The key may lie in the Fed's plans for rate cuts, which officials have signaled might not occur until mid-2024 or even later. That could prevent companies from borrowing money for repurchases until later this year or early 2025, according to Michael Sheldon, chief investment officer at RDM Financial Group.

Still, buybacks appear ready to make a comeback. Capital spending as a share of sales has recovered to the pre-pandemic five-year average, partly due to surging allocations by the so-called Magnificent Seven tech giants, led by Apple Inc. Despite the company's challenges in China, its repurchase plans mean its shares continue to have upside potential after their nearly 50% gain in 2023, said Nancy Tengler, chief executive officer at Laffer Tengler Investments Inc.

"Buybacks are a way to solve problems for companies when their profit growth slows," said Tengler. "We aren't buying Apple for the fundamentals. We buy it because the company will put a floor on the stock every single time it falls."

Other companies are getting that message as well. Take Broadridge Financial Solutions Inc, the Lake Success, New York-based provider of investor communications and technology products, with a market capitalisation of over US$23 billion. It plans to spend about US$500 million on buybacks during its current fiscal year.

"I expect our shareholder returns will be more weighted toward buybacks as there isn't a lot to buy in terms of M&A," chief financial officer Edmund Reese said in an interview. "Buybacks help the stock."

Source: Bloomberg

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Economic

Forex

After several weeks of gains and having finished 2023 on a high note it was inevitable that at some point markets would probably take a step back, having been given a lift into year-end by a belief that rate cuts were coming in early 2024.

Last week saw a modest correction to that narrative with a rebound in EU inflation in December as well as a solid U.S. payrolls report which saw the U.S. economy add another 216k jobs, although we did see a 71k downward revision to previous months.

A fall in the unemployment rate to 3.7% was welcome although on a slightly more worrying note the participation rate fell sharply to 62.5% from 62.8%, while wage growth rose to 4.1% indicating that the U.S. labour market continues to look tight.

Leading into last week's data, markets were pricing in the prospect of a March rate cut at about 73.8% a simply mind-boggling probability when you look at how the U.S. economy is performing relative to say the EU where inflation levels are almost identical and where the economy is on its knees.

There was some disappointment at the softness of the ISM services data for December which showed that hiring slowed sharply to 43.3 from 50.7, however that could merely have been a case of U.S. employers doing their seasonal hiring earlier and not leaving it so late this year. The headline number was also disappointing slowing to 50.6 from 52.7, while prices paid came in at 57.4, suggesting that price pressures remained elevated.

This week attention shifts to the December CPI numbers which does have the potential to put the speculation about a March cut firmly back in its box. The sharp rebound in yields last week does suggest that markets are paring back pricing of a March cut with the U.S. dollar also rebounding, as stocks in the U.S. declined for the first time in 9 weeks.

European markets also slid back with the DAX posting its biggest weekly loss since October, while the FTSE100 posted its biggest loss since November as a rebound in inflation and better than expected economic numbers saw traders pare back rate cut bets.

This week's main excitement looks set to be generated towards the back end of the week with the U.S. CPI report, followed by China inflation and trade numbers for December.

Opinions about inflation are becoming increasingly split between concerns over a sharp rebound in inflationary pressures caused by higher pay settlements and the deflationary impulse being generated by the slowdown in China where both headline CPI and PPI are both in negative territory.

This perhaps helps to explain why central banks don't want to ease off the brakes when it comes to tighter monetary policy quite yet. The problem is the markets appear to have already made up its mind, with the sharp slide in yields seen since the October peaks.

One thing seems certain, rate cuts are coming, with the key question being around the timing, and it is here that the market may be getting ahead of itself.

This week ought to offer a better insight into when that might be, with the main risk being that markets are being premature in assuming it will be March.

U.S. markets managed to finish last week mainly flat on the day after a choppy session, albeit close to the lows of the week, despite rising confidence in bond markets of an upcoming March rate cut.

As we look ahead to today's European open markets here look set to open modestly lower ahead of the latest German trade data factory orders data for November both of which are expected to show an improvement on some dire October numbers.

Both German exports and imports are forecast to rise by 0.5% and 0.4% respectively after both coming in negative in October. Factory orders are also expected to rebound by 1.1% after a -3.7% decline in October.

EUR/USD – slipped to a 2-week low last week at 1.0875 before rebounding. Still feels like it wants to move higher while above the 200-day SMA at 1.0830. A break above 1.1030 has the potential to target the December peaks at 1.1140.

GBP/USD – has found support above the 1.2600 area this past 3-weeks. Remains in the uptrend from the October lows. The bias remains for further gains while above the 200-day SMA as well as support at the 1.2590 area. On course for a move towards 1.3000 while above the 200-day SMA at 1.2520.

EUR/GBP – range bound with resistance at 0.8720 and support at the 0.8570/80 area. Bias towards downside while below 0.8670.

USD/JPY – ran out of steam at the 146.00 level last week. Vulnerable to a pullback towards the 200-day SMA at 143.20, with the 140.00 lows the next support.

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Palestinian-Israeli conflict

Latest news on the Israeli-Palestinian conflict

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