The one thing that could save the tanking markets — earnings season
- The upcoming earnings season is expected to feature aggressive buyback forecasts from companies.
- Total S&P 500 share repurchases could total $650 billion this year, which would imply a year-end level of 3,000 for the index, according to Deutsche Bank.
- Markets have been volatile as of late, but Deutsche expects the buybacks to give the market a boost.
The current stock market tumult should ease once companies accelerate the repurchase of their own shares, according to a Deutsche Bank analysis.
Major indexes fell back to around correction territory Monday thanks to a pullback in tech stocks, which have served as one part of a multi-pronged set of market obstacles over the past two months or so.
While the market is likely to face a continued run of headline risk, the willingness of companies to step in and buy back their own shares could serve as a substantial price floor amid the increased volatility.
"We expect the market to remain choppy until a sufficient number of firms to report and the corporate buyback bid gets back up to full steam," Binky Chadha, chief strategist at Deutsche Bank Research, said in a note to clients.
Deutsche predicts company buybacks to total $650 billion, which it said would amount to a 33 percent increase from 2017. (Expectations are high all around for repurchases, with J.P. Morgan Chase putting the 2018 forecast at $800 billion.)
Just by itself, the Deutsche forecast would imply a 12 percent full-year gain for the index, getting it to Deutsche's 3,000 price target by the end of 2018. The price target indicates 16 percent upside from the index's level at midday trading Monday.
Buybacks serve as one of four catalysts that Chadha sees pushing the market higher, with the other three being benefits from the sharp cut in corporate income taxes, an increase in government spending generally and defense specifically, and the ability of companies to expense capital expenditures at an accelerated level.
In addition, expected interest-rate hikes also could have a benefit in that they eventually will find their way to savings, providing a boost in income for U.S. households that are holding some $11 trillion in cash, Chadha said.
"We see Fed hikes once they pass through to deposit rates as providing a sizable boost to household income," he wrote. "So growth could get a lot stronger."
Companies will be making their buyback announcements during the upcoming earnings season, which is expected to be robust. S&P 500 firms are expected to show profit growth of at least 17.3 percent. However, some strategists think earnings themselves will provide only a limited boost as they already may have been priced in during the big 2017 market rally.
Chadha said Deutsche Bank targets specific companies within the buybacks strategy — those with high levels of free cash-flow yield, low levels of capital expenditures compared to sales, high returns on equity, low debt leverage and strong price momentum.
Deutsche's proprietary alpha buybacks basket has outperformed the S&P 500 by 15 percentage points since 2017, Chadha said. Conversely, an ETF that tracks high-buyback companies, the PowerShares Buyback Achievers Portfolio, has been a laggard, down nearly 6 percent for 2018 and up just 7 percent over the past 12 months.
Companies that have provided guidance put buybacks as just one of a number of priorities for their tax-cut windfall.
In keeping with the high-profile announcements so far, some 30 percent put one-time bonuses at the top of their lists, while a quarter hiked wages, 20 percent improved retirement or other benefits and 13 percent have instituted parental leave and other benefits, according to Bank of America Merrill Lynch. Outside of that, 40 percent indicated increases in capital expenditures and 8 percent said they would like to do deals.
About one-fifth said they would target buybacks and dividends, while 15 percent intend to pay down debt and 10 percent expect to invest in research and development.
March actually saw a decline in buybacks, but that total was impacted by the squashing of the Broadcom/Qualcomm deal. Buybacks for the month stood at $27.1 billion, an eight-month low, according to TrimTabs.