As earnings season approaches, Deutsche Bank warns that a "quiet period" may lead to a short-term pullback in US stocks

Zhitong
2024.06.25 22:20
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As the financial reporting season approaches, Deutsche Bank warns that stock buybacks entering a "quiet period" may lead to a short-term pullback in the S&P 500 and Nasdaq Composite Index. Deutsche Bank strategists point out that the quiet period restricts trading of company stocks, which may reduce buybacks. Strategists believe that the market is approaching the top of a long-term range, and a slowdown in equity flows and reduced buybacks could lead to downward pressure on the market

According to the Zhitong Finance and Economics APP, Deutsche Bank strategists warned this week that as the earnings season approaches, the stock buyback "quiet period" may lead to a short-term pullback in the S&P 500 Index and the Nasdaq Composite Index after hitting historical highs again.

Strategists Parag Thatte and Binky Chadha wrote in a report on Monday: "Strong earnings continue to provide strong support for the annual $1 trillion large-scale buybacks. However, in the short term, as companies enter the quiet period before the release of second-quarter earnings, buybacks decided by management will decrease. We estimate that by the end of next week, nearly half of the companies representing the market value of the S&P 500 Index will enter the quiet period." (See the image below)

Most listed companies have quiet period policies that prohibit trading stocks in the last two weeks before the end of the quarter until one or two days after the financial report is released.

Deutsche Bank strategists and other analysts pointed out that the quiet period before the first quarter earnings season in April was one factor that led to a slight pullback in the S&P 500 Index that month. The bank's strategists had warned in early April that the seasonal slowdown in equity flows and the temporary reduction in buybacks could make the market vulnerable to downward shocks.

Meanwhile, the long positions in the stock market have "sharply increased," approaching but not yet reaching the top of the long-term range, the strategists said. Currently positioned at the 95th percentile.

This positioning is only slightly higher than the level implied by earnings growth, but in the event of more downside surprises in macro data, it is different from the strong positive surprises in April data.

Strategists said they see "conditions for another pullback in place, with concerns covering all three elements of our demand-supply framework: a sharp but narrow surge in tech-driven positions near the top of the historical range; rising risk appetite leading to a surge in equity inflows, but now looking stretched; and the temporary reduction in buybacks reappearing as the quiet period before the second-quarter earnings season next week increases."

Led by NVIDIA Corporation (NVDA.US), the S&P 500 Index and the Nasdaq Composite Index hit a series of records in June, but saw a slight pullback over the weekend and on Monday. NVIDIA and the indices rebounded on Tuesday.

The Dow Jones Industrial Average (DJIA) has lagged behind other major indices, rising by less than 4% as of 2024, compared to gains of over 14% for the S&P 500 Index and over 18% for the Nasdaq Index

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