Before earnings season, there may be a “blackout” for stock buybacks. This could lead to another short-term drop after the S&P 500 and Nasdaq Composite hit all-time highs, warned Deutsche Bank strategists this week.
“Large buybacks at a rate of $1 trillion a year are still well supported by strong earnings.” Discretionary buybacks, on the other hand, will go down in the short term as companies go into “blackout periods” before reporting Q2 earnings, wrote analysts Parag Thatte and Binky Chadha in a note on Monday.
“By the end of next week, we expect that close to half of the S&P 500 companies will be in blackout periods,” they wrote (see chart below).
Most companies that are traded on the stock market have a “blackout” policy that stops trading in shares two weeks before the end of the quarter and for one or two days after the earnings report.
Deutsche Bank strategists and others have said that the S&P 500’s SPX small drop in April was caused by the blackout period before the first-quarter earnings season. Early in April, strategists at Deutsche Bank said that the market could be vulnerable to downturns because of a seasonal slowdown in the flow of stocks and a temporary drop in buybacks.
The strategists said that long positions in the stock market have “ratcheted higher,” getting closer to but not quite hitting the top of the long-run band. At this point, it’s at the 95% mark.
The positioning is only slightly above the level suggested by earnings growth. However, it has happened at a time when macro data has been giving more negative surprises, compared to April when data surprises were strongly positive, they said.
“Conditions are right for another breather,” the strategists said. “This time, worries span all three elements of our demand-supply framework: a sharp but narrow jump in positioning to near the top of its historical band, driven by Tech; rising risk appetite, which has led to a boom in equity inflows but now looks stretched; and a temporary slowing of buybacks again as blackout periods ramp up next week ahead of the Q2 earnings season.”
The S&P 500 and Nasdaq Composite COMP hit a string of records in June. However, they took a small step back at the end of last week and on Monday as shares of Nvidia Corp. NVDA, +6.76% fell. Nvidia was leading an increasingly narrow, tech-focused advance. The indexes and Nvidia both had a good day on Tuesday.
The other major indexes have done better than the Dow Jones Industrial Average (DJIA). It is up less than 4% so far in 2024, while the S&P 500 and Nasdaq have gained more than 14% and 18%, respectively.
