There will be an explosion of volume at the close today as it is both a quadruple witching expiration (the quarterly expiration of stock index futures and options and individual stock and index futures and options) and the quarterly rebalancing of the S&P 500. The S&P rebalances every quarter to account for additions and reductions in share count, most of which is accounted for by rewarding of options (which adds to the share count), and buying back of stock by corporations (which reduces share count).
It's a good time to review the share count, because something unusual is happening: companies are not buying back quite as much stock as they used to.
One of the main arguments cited for the stock market's advance in the last few years has been that companies keep buying back stock, which—all other things being equal—improves the earnings picture. So if a company reduce share count by 1 percent, the earnings picture will also improve 1 percent.
In the second quarter, 253 companies in the S&P 500 increased their shares outstanding, 219 decreased. This is the first time more companies increased their shares than decreased it since 2013, according to Howard Silverblatt, Senior Industry Analyst for Index Investment Strategy for S&P.
Why is that happening? I find it more useful to look at the dollar value of what has been bought. Here is the total value of what all 500 companies in the S&P bought back:
Q1 17: $133 billion
Q4 16: $135 billion
Q1 16: $161 billion
Not much of a difference between the first and fourth quarter, but that $161 billion bought back in the first quarter of last year is a big number, close to the all-time record of $172 billion bought back in the third quarter of 2007.
Why were companies so busy buying back stock in the first quarter of last year, and less interested in the first quarter of this year?
There's an obvious answer, and you can see it just looking at an S&P chart: the first quarter of last year was a real mess. Between the beginning of January and the middle of February, the S&P dropped over 250 points at one point from its January open, a better than 10% drop.
Corporations, understandably, saw the drop in their prices as a buying opportunity, and bought their stock aggressively. That is a good sign.
And the first quarter of this year? The markets hit historic highs continuously beginning in February. Corporations, understandably, probably saw their stock as expensive, and pulled back on purchases. Not necessarily bearish, but they obviously did not see bargains.
While none of these companies put out press releases explaining why they cut back stock purchases, this is the obvious explanation.
Oh sure, some might also be diverting money to increasing capital expenditures, but I don't see a huge boost in those numbers.
What's the upshot? Regardless of the reasons, S&P EPS numbers may not get quite the boost it did in the past, though the differences still appear to be small.
"Companies are going to have to increase their earnings the old-fashioned way: they're going to have to earn it," Silverblatt told me.