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Investors can expect overall stock market volatility to increase, less buying support on declines in prices, and slower growth in earnings per share, as the COVID-19 pandemic sidelines corporate stock buybacks, Goldman Sachs says.
Since the start of March, 51 companies in the S&P 500 index SPX, +0.81% have suspended their share repurchase programs, the broker’s portfolio strategy team, led by David Kostin, said. Those company programs accounted for 27% of the aggregate 2019 buybacks of S&P 500 companies.
Based on this data, and buybacks performed by Goldman’s desk, Kostin’s team expects overall stock repurchase activity from S&P 500 companies to decline by 50% to about $371 billion in 2020.
That expectation includes flat year-over-year buyback activity during the first quarter, a 75% drop in the second quarter, a 70% decline in the third quarter and a 65% reduction in the fourth quarter.
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If an estimated 40% decline in the first quarter of 2021 is included, Goldman expects 12-month repurchase volume to be 65% below the 2018 peak.
“Our quarterly review of S&P 500 earnings transcripts consistently reveals that management teams view buybacks as the lowest priority use of cash,” Kostin’s team wrote in a note to clients. “A spate of recent suspensions, escalating employee layoffs, and increasing political and social pressure will curtail buyback spending, which remains historically elevated following the passage of corporate tax reform.”
And Goldman said its economists believe that under the recently passed Coronavirus Aid, Relief and Economic Security (CARES) Act, any company that borrows money from the U.S. Department of Treasury will be prohibited from buying back stock or paying dividends until 12 months after the loan is paid off. Goldman also expects dividends to decline by 25% in 2020.
But the companies halting buybacks haven’t just been those expected to receive assistance under the CARES Act, such as airlines. Goldman noted that eight of the largest U.S. banks have announced buyback suspensions since the start of March, as have “prominent” retailers, hoteliers and cruise operators.
Read: Opinion: Airlines and Boeing want a bailout — but look how much they’ve spent on stock buybacks.
The drop-off in stock repurchases is expected to have a “significant impact” on the stock market, Goldman said, given that corporate buybacks have far exceeded demand from all other investors categories since 2010.
“The removal of the principal buyer of shares will widen trading ranges and increase volatility,” the research note said. “Reduced buyback spendings means less downside support for equity prices, since fewer firms will step in to repurchase shares if their stock prices fall.”
The S&P 500 rose 1.5% in afternoon trading Tuesday, but was down 16.3% year to date.
But that’s not all. Goldman expects overall S&P 500 EPS growth to slow, as companies had used repurchases to reduce share count, which boosted growth by simply decreasing the denominator.
“Since 2008, the gap between EPS growth and earnings growth for the aggregate S&P 500 index averaged 1-2 [percentage points] annually,” Goldman wrote.
The first-quarter 2020 earnings reporting season is about to begin in earnest next week. The FactSet consensus EPS growth estimate for the S&P 500 is currently negative 7.0%, compared with an estimate of positive 4.4% growth back on Dec. 31. For the second quarter, the EPS growth estimate has plunged to negative 15.6% from positive 5.8% as of Dec. 31.
