Market volatility will increase as a result of a decline in share buybacks and lower earnings growth per share, warns Goldman Sachs.
David Kostin, who leads the business bank’s portfolio strategy team, writes in a note to the bank’s clients that the 51 listed companies in the S&P that have suspended their share buyback programmes account for no less than 27% of total S&P 500 share buybacks in 2019.
According to Goldman Sachs calculations, in 2020 S&P companies are expected to buy only half the amount of shares they bought last year. This amounts to a reduction of $371 billion. In the first quarter buyback programmes have remained flat, followed by a 75% decrease in the second quarter, a 70% decrease in the third quarter and another 65% in the fourth quarter.
In the first quarter of 2021 Kostin expects a further decrease in share buybacks, bringing the buybacks over the next twelve months to a level 65% below the 2018 record. This will inevitably contribute to an increase in market volatility, Kostin believes.
Buybacks: no longer a priority
According to Goldman Sachs, S&P companies currently consider buybacks their lowest priority to use their excess cash for. Staff rentention is now their top priority. Moreover, companies that wish to invoke the Coronavirus Aid, Relief and Economic Security (Cares) Act are not allowed to make buybacks or pay dividends over the next twelve months. Eight of the largest banks in the US have already suspended their share buyback programmes. In addition to this, Goldman also expects dividend payments to fall by 25% this year.
The suspension of buyback programmes has a significant impact on the stock market, Goldman Sachs argues, as a major buyer disappears. This will lead to higher bandwidths and more volatility. It will also impact earnings per share (EPS) of the S&P 500.
Next week the quarterly season starts. FactSet consensus shows EPS growth of -7%. At the end of last year, growth was still expected to be 4.4 percent. EPS growth in the second quarter is expected to be -15.6%, compared to an expectation of +5.8% at 31 December.