“Good market support”: buybacks could propel shaken stock market after Fed meeting

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Share buybacks are on a tear, with the potential to help support a US stock market surprised by the Federal Reserve’s policy meeting last week.

“Buybacks can be a good support for the market if we see a pullback this summer,” said Jack Caffrey, equity portfolio manager at JP Morgan Asset Management, in an interview. “It’s very reasonable to think there will be more activity.”

Companies are resuming their share buyback programs after shutting down most of them during the COVID-19 crisis last year, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices. While buybacks are still dominated by a small group of companies in the S&P 500 SPX index,
-1.31%,
he said they have widened this year amid record gains in the economic recovery.

According to Silverblatt, profits for companies in the S&P 500 Index hit an “easy record” in the first quarter, pushing them to nearly $ 1.5 trillion in 2021. That would exceed $ 1.3 trillion. revenue in 2019, the year before COVID devastated the economy.

“Buyouts increase with profitability,” Caffrey said. “Ideally, I would like these buybacks to come from the beneficiary power rather than borrowing.”

The S&P Dow Jones Indices estimated in a report last week that S&P 500 Index companies made $ 178.1 billion in buybacks in the first quarter, up 36.5% from the last three months of Last year. That’s double the volume seen in the second quarter of 2020, when the COVID-19 pandemic wreaked havoc on markets, but remains 10% below the level reached in the first three months of this year, according to the report.

While tech companies have dominated share buybacks, banks are poised to increase them after the Fed announced earlier this year that its temporary restrictions on them would end on June 30, Silverblatt said. The Fed cracked down on buyout activity in 2020, when companies were accumulating liquidity in lockdowns caused by the pandemic, and began to relax its ban in December.

Wall Street is already getting back to it.

Top 20 business buyouts in the first quarter included JPMorgan Chase & Co. JPM,
-2.53%,
Goldman Sachs Group Inc. SG,
-3.50%,
Bank of America Corp. BAC,
-2.56%
and Morgan Stanley MS,
-4.35%,
according to the S&P Dow Jones Indices report. This year, “banks and financials will tend to increase buybacks,” Marco Pirondini, head of equities for Amundi’s US operations, said in an interview.

See: Here are the most ‘money-hungry’ industries with share buybacks set to pick up, according to Moody’s

Cash-rich tech giants always stand out for the biggest buyouts.

Among the companies in the S&P 500 index, Apple Inc. AAPL,
-1.01%
repurchased the largest number of shares in the first quarter at $ 18.8 billion, followed by Google’s parent company Alphabet Inc. GOOGL,
-1.34%
at around $ 11.4 billion and Microsoft Corp. MSFT,
-0.56%
to $ 6.9 billion, according to S&P Dow Jones index data. Berkshire Hathaway Inc. BRK.B,
-1.67%
had the fourth-highest buyout volume at $ 6.6 billion, followed by Facebook Inc. FB,
-2.04%
to $ 5 billion.

But the pool of companies returning to the buyout market is growing, says Silverblatt.

Consider that the top 20 S&P 500 buyouts fell to about 53% of the total in the first quarter, down from 66% in the previous three months, according to the S&P Dow Jones indices. That’s still higher than the historic average of 44.5% before COVID, Silverblatt said.

Buying back shares is not exactly cheap for companies. The US stock market is not far from all-time highs, even with major benchmarks falling last week after the Fed policy meeting surprised many investors with a hawkish tendency.

Meanwhile, the market remains supported by the Fed, which has left its bowl of punch in place. While Fed officials at the meeting signaled an earlier-than-expected interest rate hike, their median forecast is to keep rates close to zero until 2023. And the central bank maintains its 120 purchases. billions of dollars in treasury bonds and mortgages every month. In other words, the Fed remains accommodating of the markets even as its tone has become more hawkish thanks to the economic recovery.

See: Barclays raises Fed cut expectations after FOMC meeting

Investors understand that “at some point the punch bowl wears off,” but in an environment of “extremely low interest rates” they will continue to seek returns on the stock market, said Matthew Tuttle, CEO and chief investment officer. Tuttle investments. Capital Management, in an interview. Meanwhile, buybacks, which push stock prices up, should help support the stock market this year, Tuttle said.

Buybacks remained heavy in the second quarter, according to Winston Chua, an analyst at EPFR, a tracker of fund flows and equity market data that is part of Informa. Chua estimates that companies that trade on the U.S. exchanges made about $ 583 billion in buybacks through June 17, exceeding the $ 472 billion made in 2020.

“It’s a little quieter now,” Chua said in an interview. Regulatory restrictions on companies making buyouts as they enter their quarterly earnings season are creating a lull, explained Caffrey of JP Morgan Asset Management.

Although they have come back in force in 2021, the buybacks are unlikely to reach the record high of $ 1.1 trillion set in 2018, based on EPFR data, according to Chua. The pace tends to slow down later in the year, he said.

“Stock prices, in general, are up,” Silverblatt said, meaning companies “will have to spend more to get more stock” as they resume buybacks this year.

According to Chua, buying back shares at high prices can attract criticism, especially if company insiders profit from selling shares at the same high levels. “It’s a way of making it look like they’re earning more than they actually are,” he said.

Tuttle said he understood the political concerns about companies using money to buy back stocks when the money could be used for other purposes, such as business investment. “But from an investor’s perspective, that’s not a bad thing,” Tuttle said, as shareholders can benefit from buybacks that increase the company’s stock price.

Many companies that undertake buyouts to increase earnings per share have the sales and cash flow strength to do so, according to Silverblatt. “Otherwise, you’re in trouble,” he said.

“You start to borrow money to make redemptions,” Silverblatt said, “That’s a bad sign.”

US stocks fell sharply on Friday as investors continue to digest the results of the Fed meeting amid lingering concerns over inflationary pressures. For the week, the Dow Jones Industrial Average DJIA,
-1.58%
lost 3.5%, the S&P 500 SPX index,
-1.31%
lost 1.9% and the Nasdaq Composite COMP,
-0.92%
decreased by 0.3%.

There was no US economic data on Friday as the government observes the June 15 holiday. Next week’s US economic calendar includes reports on home sales, personal income, and the core PCE price index – the Fed’s preferred measure of inflation.



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