- The US stock market has been looking to regain its footing after a sharp 10% correction caught it off guard, spurring a period of elevated volatility.
- JPMorgan sees one potentially record-setting dynamic underpinning further equity gains as companies take advantage of their lower valuations.
Recent turbulence has derailed the US stock market‘s quest to set repeated all-time highs. But equities look headed for a record of sorts — one that could ultimately be their saving grace.
Companies in the benchmark S&P 500 are on pace to execute more than $800 billion in gross share buybacks in 2018, which would shatter the previous annual record, according to JPMorgan estimates. As a result, the firm says, investors should respond by employing a strategy of adding to existing positions during times of market weakness.
The reason is simple: Buybacks have been a safety net of sorts for the stock market through the almost nine-year bull market. Their accretive effect on share prices is a crucial upward catalyst for equities during periods devoid of other positive drivers.
“With strong buyback activity persisting and systematic de-risking behind us, we recommend investors to continue buying market dips,” Dubravko Lakos-Bujas, JPMorgan’s head of US equity strategy, wrote in a client note.
But $800 billion is an awful lot of money, especially considering that S&P 500 companies executed just $530 billion of buybacks in 2017. Where are these companies going to get enough capital to buy back that many more shares? JPMorgan has some ideas as to how they can put roughly $300 billion more to work this year:
- $100 billion from stronger earnings and tax cuts— The firm notes the “consensus expects S&P 500 net income to grow by roughly $215 billion versus last year.”
- $200 billion from cash repatriation— “Cash repatriation of $1.2 trillion of cash earnings held abroad could boost shareholder payouts by at least ~$450 billion in the coming years (assuming a 75% payout rate on repatriated cash and 50% buyback rate).”
Another possible driver of record-setting buybacks in 2018 are the lower stock valuations seen market-wide since all major US indexes suffered a 10% correction in early February. Now that stocks have repriced somewhat, many shares aren’t as prohibitively expensive as they were during the market’s record-setting streak.
UBS would certainly seem to agree. Just last week, the firm cited buybacks as well as mergers and acquisitions as providing a crucial backstop for further stock market resilience.
“The surge in buyback and M&A announcements suggests corporates are once again providing the fuel for the next leg up in equity markets,” Keith Parker, the head of US equity strategy at UBS, wrote in a note to clients.
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