Forget the ‘Fed put’. Here’s how corporate buybacks could rescue the stock market.

As US stocks extend their gains heading into a holiday weekend, with the Dow DJIA,
+0.96%
On track to post his longest streak of daily earnings since March, JPMorgan Global Markets Strategist Marko Kolanovic, one of the most vocal stock bulls on Wall Street, has just released a new note to clients telling them warns that stocks may have finally bottomed out: for now.

To be sure, 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 stocks are already they are not a monolith with all sectors moving together.

Instead, it has become important for investors to differentiate themselves as value stocks outperform growth and some of the previously underdog sectors of the market, such as energy, outperform.

As a result, Kolanovic told clients in a note dated Wednesday that asking what level to buy the market at is “the wrong question.”

Instead, “the best question is, ‘[W]In which segments should I invest?’ There are currently great opportunities in some market segments such as energy, small caps, high beta/cyclicals and [emerging markets]many of which are trading at record valuation discounts, while others still look expensive and are poised to underperform, such as bond proxy sectors.”

But with so many investors determined to anticipate a market bottom, Kolanovic discussed the possibility of a broad-based rally fueled by “the corporate put option.”

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

Now, with the Fed content to sit back and let financial conditions tighten, corporations are stepping into the breach.

The corporate put option remains extremely active, Kolanovic said. While the IPO market has dried up, JPMorgan noted that S&P 500 companies have announced $429 billion in buybacks since the beginning of 2022, a stronger pace than in 2019 and 2021. Share buybacks are driven by strong healthy cash flows and margins. , Kolanovic said, and investors can expect them to continue unless the economic situation deteriorates severely.

Based on first-quarter results, buybacks were up 45% year-over-year and 3% quarter-over-quarter, led by technology ($62 billion during the first quarter), financials ($49 billion) and healthcare ($ 39 billion). In particular, energy has significantly increased buyback activity to $9.5 billion compared to just around $500 million in the first quarter of 2021. In the short term, the buyback trend remains well supported as more companies they come out of the blackout, although about 15% remain inside the window.

Of course, it’s not just corporations that buy shares. Another team of JPMorgan analysts recently noted that they expect a “rebalancing” by mutual funds, pension funds and sovereign wealth funds to spark a short-term rebound in stocks.

But there are other reasons to be bullish on stocks that are entirely exogenous. An idea comes courtesy of another team of JPMorgan analysts: a team of cross-asset strategists led by Thomas Salopek, the bank’s global derivatives and quantitative strategist.

While it’s hard to be precise about these kinds of forecasts, Salopek and his team offered three reasons why Treasury yields peaked in the short term. And since stock valuations are a factor of the underlying risk-free rate (which is represented by the 10-year Treasury yield), stability in Treasury yields could lead to stability in stocks.

Among other reasons, the team cited the recent pullback in break-evens, a measure of the difference between the Treasury’s nominal yield and that of an inflation-protected counterparty, as boding well for equities.

Still, as more investors question whether they should shift to a more bullish outlook, Nick Colas, senior equity analyst at DataTrek, noted in a note to clients that “there is no need to decide at this point whether we are in a correction or a breakout 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, then the data says there will be plenty of time to buy later. Either way, the price of waiting is low, and the cost of receiving a wrong call could be very high.”

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