Understanding the Market | Who Will Save the US Stock Market from a "Black Start" in the New Year?

The US stock market started off weak in 2024. However, as the earnings season begins, companies are starting to announce stock buyback plans, which could change the situation this week. Investors hope that this will help the market continue its upward trend from last year. Bulls may need support as hedge funds and retail investors, after a strong year-end, have become more defensive, intensifying concerns about the timing of the Fed's interest rate cuts and increasing cautious sentiment.

Brian Reynolds, Chief Market Strategist at strategic company Reynolds Strategy, said, "I am optimistic about the stock market in 2024, but due to bearish institutional views, the next few months will be turbulent. Once the selling pressure subsides, companies will buy back stocks to boost stock prices." Reynolds correctly predicted the bear market during the global financial crisis in 2008.

US companies have been reluctant to buy back stocks because the Fed has raised interest rates to combat inflation, thereby increasing borrowing costs. Data shows that stock buybacks have declined for five consecutive quarters since reaching a record high in 2022. However, with the Fed possibly preparing to cut interest rates and expectations of improved earnings growth, investors expect more companies to invest newly acquired funds in the stock market.

The fate of the stock market does not solely depend on buybacks, but the nearly $1 trillion in stock buybacks each year is one of the largest buying forces. Data shows that in the past year, S&P 500 index component companies spent nearly $800 billion on buybacks, a decrease of nearly 20% compared to the same period last year.

Preliminary data from the S&P Dow Jones Indices shows that S&P 500 index component companies are expected to spend at least $840 billion on stock buybacks by 2024. The S&P Dow Jones Indices shows that buyback spending for the 12 months ending in September was $787 billion, a decrease of nearly 20% compared to the same period last year. The historical high was $923 billion in 2022.

Wendy Soong, a senior analyst at Bloomberg, said that overall, total corporate buybacks in the third quarter decreased by 18% compared to the same period last year. Over 40 S&P 500 index component companies have announced buybacks in the fourth quarter, with a total size of $163 billion, a decrease of nearly one-third in US dollar terms compared to a year ago. These companies include Cigna Group (CI.US) and Adobe (ADBE.US), both of which have cash on hand after failed acquisition plans.

Market Timing

The tricky part for executives and investors will be finding the right timing, both in terms of when to buy back stocks and when to expect a surge in stock prices. The key may lie in the Fed's interest rate cut plans, as officials have hinted that the Fed may not cut rates until mid-2024 or even later. Michael Sheldon, Chief Investment Officer at RDM Financial Group, said this could prevent companies from borrowing to buy back stocks later this year or early 2025. However, stock buybacks seem to be making a comeback. The ratio of capital expenditure to sales has returned to the five-year average before the pandemic, partly due to the significant increase in capital expenditure by the so-called "Magnificent Seven Giants" led by Apple Inc. (AAPL.US). Nancy Tengler, CEO of Lafer Tengler Investments Inc., pointed out that despite the challenges the company faces in the Chinese market, its buyback plan indicates that there is still potential for the company's stock price to rise by nearly 50% after 2023.

Tengler said, "Buybacks are a way for companies to address issues when profit growth slows down. We buy Apple stock not for the fundamentals. We buy it because every time the stock price falls, the company sets a floor for the stock price."

Other companies have also received this message. Take Broadridge Financial Solutions Inc. as an example, a provider of investor communication and technology products with a market value of over $23 billion. The company plans to spend approximately $500 million on buybacks in the current fiscal year. Edmund Reese, CFO of the company, said in an interview, "I expect our shareholder returns to be more weighted towards buybacks, as there are not many attractive acquisitions to be made. Buybacks are beneficial to the stock price."