Corporate buybacks can help stocks hit the bottom
- JP Morgan said a record rise in corporate buybacks could help the stock market hit bottom.
- The bank estimated that buybacks increased three to four times higher than normal during the ongoing sale.
- S&P 500 companies announced $429 billion in buybacks in 2022, a higher pace than in 2019 and 2021.
JPMorgan said in a note on Wednesday that the stock market may be on the cusp of bottoming thanks to the continued implementation of share buybacks by companies.
Corporate buybacks have skyrocketed during the ongoing stock market downturn, and a record amount of buybacks have been announced so far this year, according to the bank.
“In the latest sale, JPM estimates buybacks at a rate of 3-4 times higher than trend, which means the company’s position remains active,” said JPMorgan’s Marko Kolanovic.
S&P 500 companies have reported a record volume of buyback activity so far this year, at $429 billion. That level represents a stronger pace of the year so far compared to 2019 and 2021, according to Kolanovic.
In the first quarter of 2022, buybacks were up 45% year-over-year and 3% year-over-year. Much of that growth was in the technology, financial, and healthcare sectors, with share buybacks totaling $62 billion, $49 billion, and $39 billion, respectively.
Energy companies also boosted their share buyback activity significantly as they benefit from higher oil prices, as the sector repurchased $9.5 billion of shares compared to just $500 million in the first quarter of 2021.
The rising trend of share buybacks should remain in place over the next few weeks as more companies emerge from the blackout period following the release of quarterly earnings results. JPMorgan estimates that 15% of companies are still in the blackout window.
JPMorgan sees high corporate share buyback activity not overly expanding, and is likely to continue as companies continue to generate strong cash flows with healthy margins, even in the face of what many market participants see as elevated risk.
JPMorgan also sees month-end rebalancing flows outperforming stocks by 1% to 3% over the next week as pensioners sell bonds and buy shares.
This, combined with the worst investor sentiment since the major financial crisis in March 2009 and strong corporate share buybacks, gives JPMorgan the conviction that the stock market bottom is close, if not already reached.