market to get $1 trillion boost via buybacks, says Goldman
Published: Aug 7, 2018 10:02 a.m.
and internet-related stocks likely to be biggest beneficiaries of
generous buyback programs
It is raining buybacks.
The stock market’s new
buzzy number is $1,000,000,000,000. And after one prominent tech giant
hit that market-value milestone last week, the 13-digit figure may
hold a different level of resonance for the broader market in terms of
Indeed, analysts at
Goldman Sachs project that stock repurchases will reach $1 trillion
this year, up 46% from 2017 on the back of tax reform and strong
corporate cash flows. And investors are likely to see immediate the
impact of those repurchases as August tends to be the most popular
month for buybacks. The month usually accounts for 13% of such deals
for the year, Goldman says.
“More than 80% of
firms in the S&P 500 have reported results and may resume repurchasing
stock on a discretionary basis after being on hiatus for the past
month,” said David Kostin, chief U.S. equity strategist at Goldman
Sachs, in a note released Monday.
Kostin is referring to
a so-called blackout period in which companies cease repurchasing
their shares ahead of announcing their latest quarterly financial
updates to avoid running afoul of regulatory disclosure rules.
senior index analyst at S&P Dow Jones Indices, also noted that
buybacks are occurring at a more accelerated pace.
“Buybacks are again
running stronger than expected,” he said.
repurchases are up 57% from the same period a year earlier, with
notable activity in the tech sector where buybacks surged 130%
year-over-year, according to Silverblatt.
buybacks are expected to play a critical role in supporting prices as
big investors such as mutual funds and pension funds have been net
sellers, Kostin said.
The Goldman strategist
maintains his year-end S&P 500 forecast of 2,850 which suggests that
the market is largely expected to be rangebound until the end of the
year although he projected a 12-month target of 2,925.
Aside from buybacks,
the big picture favors the market.
economic activity to remain healthy with consumer sentiment at its
highest in nearly 20 years. That confidence has translated to robust
corporate results with a large number of companies turning in
“With 81% of S&P 500
firms reported, second-quarter sales rose by 12% and earnings per
share increased by 24% vs. last year. 56% of companies have beaten
consensus EPS by at least a standard deviation of estimates, the
highest rate since 2010,” he said.
He also dismissed
concerns among some analysts that stocks are headed for a correction,
defined as a drop of at least 10% from a recent peak, as well as the
growing belief that the technology and internet-related sector will be
the broader market’s undoing.
“The bears argue that
positioning in the sector is ‘crowded,’ the sector is overvalued,
growth has peaked, and second-quarter results will lead to a sharp
decline in long-term growth prospects, with devastating consequences
for stocks as highlighted by the plunge in Facebook shares after it
cut guidance last week,” he said.
last month came under extreme pressure with the stock losing more than
15% from its record on July 25 after it issued a disappointing
outlook. Facebook’s meltdown was followed by Twitter Inc.
which saw its stock tumble nearly 30% after releasing weak earnings.
The dramatic decline in the two high-profile names led to a closer
scrutiny of the sector and sparked concerns that technology stocks
have hit a temporary growth wall.
Not so, said Kostin.
“The rate of earnings
growth has certainly peaked as the surge in profits from the initial
cut in tax rate was always going to be most pronounced in 2018. And
glamour ‘one decision’ stocks often disappoint investors when the
lofty growth rates embedded in valuations turn out to be unachievable.
But since the start of the second-quarter earnings season, the
consensus forecast for 2019 tech sector EPS has actually increased by
1%,” he said.
Tech stocks are
expected to be among the biggest beneficiaries of the $1
trillion-buyback bonanza given many tech companies still have yet to
complete their existing repurchase programs.
its part. Apple Inc.
which achieved its milestone as the first U.S. company with a $1
trillion market cap last Thursday, in May approved a new $100 billion
Sue Chang is a MarketWatch reporter in San Francisco.
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