AAPL Apple Inc

By Amrith Ramkumar 

A steady stream of robust earnings and economic data has virtually zapped volatility from U.S. stocks, but a coming freeze on share buybacks could challenge the market.

Companies typically don't repurchase their own shares in the month before reporting quarterly results due to regulations, and with the third quarter coming to an end, 86% of the S&P 500 will be temporarily restricted by Oct. 5, according to Goldman Sachs analysts led by David Kostin.

That could remove a key source of support to financial markets: Buybacks currently account for the largest percentage of cash spending by companies in the benchmark index for the first time in 10 years, the bank said in a note Friday.

Share repurchases can play a role in boosting stock prices because they lower the number of shares outstanding -- driving up per-share earnings even without overall profit growth. Company demand can also trigger stock-price gains.

Analysts have said record stock buybacks have underpinned recent market advances, helping major indexes stay near all-time highs despite ongoing U.S.-China trade tensions and a rout in emerging markets. Historically, companies used the most cash on capital expenditures -- spending on factories, equipment and other goods. However, in the first half of the year, share buybacks increased nearly 50% and approved repurchases are on pace to set a new full-year record above $1 trillion, Goldman said.

That is why the imminent blackout period for buybacks injects uncertainty for investors and traders. Returns from the S&P 500 during blackout and nonblackout periods have been roughly in line going back to 2000, but market volatility tends to be higher when buybacks aren't allowed, the Goldman Sachs analysts found.

Although major indexes have been calm lately, sudden outsize market moves could sour investor sentiment toward stocks, analysts say. That occurred when the market tumbled in February.

With nearly 20% of the S&P 500 already unable to buy back shares, Beijing is debating how to retaliate against fresh U.S. tariffs on $200 billion of Chinese goods announced late Monday.

And next week, the Federal Reserve is expected to raise rates and update its projected path for future increases, potentially stoking fears that tighter financial conditions could challenge companies and consumers.

While some analysts aren't as concerned about the blackout period because almost 80% of the growth in buybacks has been concentrated in 10 companies, most notably Apple, a quick pickup in volatility could cause investors to reassess the market backdrop.

Write to Amrith Ramkumar at amrith.ramkumar@wsj.com

(END) Dow Jones Newswires

September 18, 2018 08:14 ET (12:14 GMT)

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