Forget the ‘Fed put’ – here is how corporate buybacks could rescue stocks


US equities widen earnings ahead of a holiday weekend, with the Dow on track to release its longest daily earnings streak since March, JP Morgan’s global market strategist , Marko Kolanovic, one of Wall Street’s most popular bullish, has just released a new note to clients informing them that the shares may have finally found a bottom, at least for now.

Undoubtedly, as investors and markets adjust to the new era of non-zero benchmark interest rates as a result of the Federal Reserve’s efforts to control inflation, it is becoming increasingly clear that equities they are no longer a monolith with all sectors moving in tandem.

In contrast, it is important for investors to differentiate themselves, as value stocks outperform growth and some of the previously unpredictable sectors of the market, such as energy, outperform.

As a result, Kolanovic told customers in a note dated Wednesday that wondering at what level buying the market is “the wrong question.”

Instead, “… the best question is ‘which segments should I invest in?’ There are currently great opportunities in some market segments such as energy, small caps, high beta / cyclical and emerging markets, many of which are trading at record valuation discounts, while others still look expensive and are willing to have lower performance, such as bond proxy sectors “.

But with the intention of so many investors anticipating a “source,” Kolanovic discussed the possibility of a broad rebound driven by the “corporate put.”

Until recently, investors attributed the durability of stock valuations to the “Fed put”, the notion that the Fed would help “buy back” the market if it ever fell to uncomfortable levels, as if the central bank had sold. a put option.

Now, with the Fed’s content to sit back and let the financial conditions tighten, corporations are going into default.

Kolanovic said the corporate putt is still extremely active. Although the initial public offering market has dried up, JPM noted that S&P 500 companies have announced $ 429 billion repurchases since early 2022, at a faster pace than in 2019 and 2021. stock repurchases are motivated by strong cash flows and healthy margins. Kolanovic said, and investors can expect them to continue unless the economic situation deteriorates seriously.

First-quarter earnings rose 45% year-on-year and 3% quarter-on-quarter, led by technology ($ 62 billion in the first quarter), finance ($ 49 billion) and health care. $ 39 billion). In particular, energy has significantly increased repurchase activity to $ 9.5 billion compared to only about $ 500 million in 1Q21. In the short term, the buyback trend remains well supported as more companies exit the blackout, although there is still about 15% inside the window.

Of course, it’s not just corporations that are buying stocks. Another team of JP Morgan analysts recently noted that they hope that the “rebalancing” of foreign investment funds, pension funds and sovereign wealth funds could lead to a short-term rebound in equities.

But there are other reasons to be optimistic about actions that are completely exogenous. One idea is courtesy of another team of JP Morgan analysts – a team of cross-asset strategists led by Thomas Salopek, the bank’s global derivatives and quantitative strategist.

While it is difficult to be accurate about such forecasts, Salopek and his team offered three reasons why Treasury yields have peaked in the short term. And because equity valuations are a factor in the underlying risk-free rate (which is represented by 10-year Treasury yields), the stability of Treasury yields could lead to stock stability.

Among other reasons, the team cited the recent decline in break-even points, a measure of the difference between the nominal performance of the Treasury and that of its inflation-protected counterpart, as a good omen for stocks.

However, as more investors question whether they should take a more bullish view, Nick Colas, senior data analyst at DataTrek, noted in a note to clients that “there is no need to decide right now whether we are in a correction or a break market ”, as there are strong arguments on both sides.

“Instead, let the market tell us. If we can hold out here for a few weeks, great. If not, the data says there will be plenty of time to buy later. Either way, the wait price is low and the cost of making that mistake can be very high. “



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