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Why next week looks a lot more bullish for stocks

A so-called buyback blackout period has challenged markets in October. But this freeze on corporate share repurchases lifts for a hefty chunk of companies after this week’s packed schedule of earnings releases, giving way to smoother sailing for equity markets, some analysts predict.

This week, about one-third of S&P 500 companies across the 11 main sectors report quarterly results. That means next week, “blackout periods which have been the subject intense focus should start easing,” Deutsche Bank strategist Parag Thatte wrote in a note to clients. He estimates that buybacks will slowly revert to a normal pace of $15 billion per week on net, or $19 billion gross.

The number of S&P 500 companies in a blackout period will ease up starting this week.
The number of S&P 500 companies in a blackout period will ease up starting this week.

UBS strategist Keith Parker expressed similar optimism in a note Tuesday, anticipating that buybacks will rise from a weekly pace of about $10 billion recently to more than $45 billion by mid-November.

Share buybacks can help boost stock prices by lowering the number of shares outstanding, pushing up earnings per share without increases in profit. Furthermore, they decrease the supply of shares in the market.

However, companies tend not to repurchase their own shares prior to and shortly following quarterly earnings reports due to securities regulations.

“During this cycle, stock buybacks have been a consistent theme for US corporates due to strong earnings growth, rising leverage spread (earnings yield less cost of debt), and, more recently, tax cuts and cash repatriation,” JP Morgan analyst Dubravko Lakos-Bujas wrote in a note last week. Executed buybacks have totaled $4.5 trillion, contributing to about 30% of this cycle’s market capitalization expansion. JP Morgan anticipates that buyback activity for S&P 500 companies will reach at least $900 billion this year, Lakos-Bujas said.

Market conditions may be improve. (GoodFreePhotos)
Market conditions may be improve. (GoodFreePhotos)

In September, the S&P 500 was already ripe for a 3% to 5% pullback that has historically occurred every two to three months. The actual pullback in early October was slightly later and “a bit larger” than anticipated, Thatte noted. The S&P 500 (^GSPC) is off 5.85% for the month-to-date as of market close Tuesday, while the Dow (^DJI) is down 4.7%. The Nasdaq (^IXIC) has retreated 7.54%.

As Lakos-Bujas put it, the “coincident sell-off in bonds perpetuated the decline and allowed macro headlines to flourish,” including those highlighting concerns of runaway inflation, rising bond supplies, the growing US deficit and quantitative tightening. But Lakos-Bujas believes October’s turbulent equity trading is a “temporary correction within an ongoing bull market” amid a backdrop of still-positive corporate earnings and non-inflationary growth.

Corporations will likely hasten the process of buybacks in the wake of the selloff, narrowing the gap between announced and executed buybacks, Lakos-Bujas noted.

“With the largest one-way buyer returning in size to the market post earnings, we expect liquidity to improve and equities to move higher,” Lakos-Bujas said.

Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck

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