Goldman: Buyback Burst Could Be Enough to Save the S&P 500’s Year

30 Sep 2015 | Author: | No comments yet »

Goldman: Buyback Burst Could Be Enough to Save the S&P 500’s Year.

Stock repurchases may accelerate enough toward the end of the year to salvage an annual gain for the Standard & Poor’s 500 Index, according to David Kostin, Goldman Sachs Group Inc.’s chief U.S. equity strategist. But the index is currently down more than 8 percent year to date, and the track record for digging out of a third-quarter slide is not good. “I’m less confident in this market than I’ve been in a long time. It doesn’t mean I’m in the bear camp,” said Randy Frederick, managing director, trading and derivatives at Charles Schwab. “We could be in for more of this yuck until December. The fourth quarter is the year’s busiest three-month period for S&P 500 repurchases, accounting for 30 percent of outlays, according to Kostin’s data.

Monday Goldman said slower economic growth in the U.S. and China and a lower oil price than the bank previously anticipated were reasons it took its target from 2100 to 2000. It closed 2 points higher Tuesday at 1,884, after rocking back forth in a wide range that took it between 1,899 and 1,871, just 4 points above its August low. These figures don’t add up to 100 percent because of rounding. “Buybacks represent the single largest source of demand for U.S. equities,” he wrote, adding that he expects companies in the index to spend more than $600 billion this year on their own shares. “The typical year-end surge in buyback activity could help boost the market above our year-end target.” Kostin reduced his projection for the S&P 500 to 2,000 from 2,100. The index entered the last day of the third quarter with a quarterly loss of 8.6 percent. “I was thinking we could see high single-digit gains this year, but I’m now in the boat where we’ll be fortunate if we get back to unchanged,” Frederick said.

For RBC strategist Jonathan Golub, it was the recent market selloff and “weaker corporate results” that prompted him to downwardly revise his view. One of the biggest headwinds is China’s economic growth which Goldman describes as “much slower than we previously assumed.” Brent, the global benchmark for crude, has tumbled about 25% since June. But we were starting way down in value and now we were just a few points from the all-time high,” said Frederick. “I was hoping we’d get a Fed rate hike and that would give us a nice boost that would be a shot in the arm of confidence for the economy.” Some strategists have been paring back their expectations and now see smaller stock market gains, but Goldman Sachs strategists Tuesday said they see an actual decline. As the firm aptly notes, the “outlook for future gains has diminished.” As you may recall, in early September, the firm’s commodities team cut estimates for both Brent and West Texas Intermediate (WTI) crude adding that prices could hit $20 a barrel. He cited a Goldman sentiment indicator, based on S&P 500 futures trading, that has been at the lowest possible reading for seven of the past eight weeks.

Savita Subramanian, a strategist at Bank of America Merrill Lynch, cut her year-end price target Sept. 8, citing the stock market correction and Bank of America’s Sell Side Indicator model that moved from positive to neutral on U.S. stocks. Morgan Chase & Co. strategist Dubravko-Lakos Bujas cut his 2015 estimate Aug. 25, attributing the move to continued U.S. dollar strength and technical deterioration. A looming rate rise by the Federal Reserve, a potentially controversial debate over the debt ceiling and another quarter expected to generate negative earnings growth are all hurdles stocks have to deal with in the near term. Chicago PMI. [Expected 52.9 vs. 54.4 in Aug.] Among 21 strategists followed by Birinyi Associates, the average S&P 500 price target for 2015 is 2177, nearly 16% above where the index closed Tuesday. Historically, S&P 500 price-to-earnings multiples fell by an average of 8% during the three months following Fed “liftoff” in 1994, 1999 and 2004.

While the market puts higher odds of a first-quarter rate increase, analysts expect volatility around the Oct. 28 and Dec. 16 meetings. “I think the Fed has painted themselves into a box,” said Jeffrey Saut, Raymond James chief investment strategist. “My model has always said the Fed raises in November even though there’s not a meeting.” Saut said the market would benefit from a rate hike. ADP’s August payrolls Wednesday totaled 200,000 jobs, slightly better than expected, but ADP has not really been a good predictor of the government payrolls. Among the strategists Birinyi follows, Michael Purves of Weeden & Co. has the highest year-end target of 2350, an estimate he has maintained throughout the year. Markets have also been monitoring Washington where Congress was expected to pass a spending bill Wednesday to prevent the government from being shut down. Shares in Costco fell 1.2% in late trading Tuesday after the company reported lower fuel prices and the stronger U.S. dollar again weakened sales in the latest quarter, even as profit improved 10%.

Apple’s Business-Related Revenue Hits $25 Billion: Apple’s revenue from its enterprise business reached $25 billion for the year ended in June, suggesting the company is starting to produce results from its push for business customers. Volkswagen May Not Face Environmental Criminal Charges: A Justice Department investigation into whether Volkswagen should face criminal charges for cheating on emissions tests highlights what some lawmakers say is a long-standing gap in U.S. environmental law. Trial of Uber Executives Starts in Paris: Two top executives at Uber Technologies went on trial Wednesday for alleged criminal violations in France that could lead to prison time, the harshest legal riposte yet faced by the car-hailing company in regulatory battles from Amsterdam to Seoul.

Valeant’s Big Winners – Pershing Square, ValueAct — Take a Big Hit: Valeant Pharmaceuticals Internationa — activist hedge-funds Pershing Square Capital Management and ValueAct Capital Management — were among the biggest winners. Emerging Markets See Biggest Exodus Since 2008: Global investors are estimated to have pulled $40 billion from emerging-market stocks and bonds during the current quarter, the most for a quarter since 2008. Debt-Market Tumult Hits Corporate-Bond Sales: Bond-market turmoil mounted Monday, as three companies reduced or put off planned bond sales in response to soft investor demand, damped by concerns that a global economic slowdown is taking shape.

Consumer Confidence Improves: Consumers’ outlook on U.S. economy improved—with the Conference Board’s consumer confidence index climbing to 103.0 in September from August’s revised 101.3—suggesting Americans weren’t rattled by recent global turmoil. A landmark study of 118 companies and nearly 30,000 employees by Lean In and McKinsey reveals why—and what employees and companies can do about it.

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