Buyback Activity Expected to Boost Equity Market, Goldman Sachs Says
Goldman Sachs predicts that a surge in buyback activity will provide a much-needed boost to the equity market in the upcoming weeks. As the second-quarter earnings season draws to a close, Goldman estimates that 95% of S&P 500 companies have emerged from their blackout periods. In August, there has been a notable increase in repurchase volume from large-cap companies, with executions reaching approximately 40% above the average level seen in 2023.
According to David Kostin, Goldman's head of U.S. equity strategy, the reopening of the buyback blackout window will contribute to the rise in equity demand in the coming weeks. However, Kostin notes that this may be partially offset by an expected flurry of equity issuance in the fall.
Goldman Sachs has identified a basket of 50 sector-neutral companies with above-average repurchase activity that historically perform well following the second-quarter earnings season. This basket has outperformed the equal-weight S&P 500 by 4 percentage points this year. Some of the stocks included in Goldman's basket are Tapestry, Lockheed Martin, HP, Dollar General, Applied Materials, and Bath & Body Works.
It is important to consider potential factors that could hinder buyback activity. Higher interest rates may lead to a slowdown in buybacks, as many companies tend to issue debt to repurchase stocks. Additionally, elevated share prices could dampen the appetite for corporate buybacks, as companies may find it less attractive to repurchase shares at higher valuations.
In conclusion, Goldman Sachs anticipates that the equity market will receive a significant boost from increased buyback activity in the coming weeks. While certain stocks, such as those in Goldman's buyback basket, may benefit more than others, it is crucial to monitor potential obstacles like higher interest rates and elevated share prices that could impact the pace of buybacks.
Impact on New Businesses
The anticipated surge in buyback activity and its potential boost to the equity market could have notable implications for new businesses.
For startups and small businesses seeking investment, this could present an opportunity. As larger companies engage in buybacks, investors may look to diversify their portfolios with shares in newer, smaller companies. This could lead to increased investment in startups and small businesses, providing them with the capital they need to grow.
However, new businesses must also be aware of potential market volatility. The increase in buyback activity, coupled with potential higher interest rates and elevated share prices, could lead to fluctuations in the market. New businesses must be prepared to navigate these changes and adjust their strategies accordingly.
In conclusion, while the expected surge in buyback activity could boost the equity market and potentially benefit new businesses, it's essential for these businesses to remain vigilant. Market conditions can change rapidly, and businesses must be prepared to adapt to ensure their survival and growth. This is a clear reminder that in the world of business, staying informed and being adaptable are key to success.