AAPL Apple Inc

By Amrith Ramkumar 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 19, 2018).

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 because of 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 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.

The current blackout period comes during another remarkably placid period for U.S. stocks. The Cboe Volatility Index, which measures expected swings in the S&P 500, has dropped in five of the last six sessions and remains near historically low levels.

Meanwhile, the S&P 500 has gone 59 trading days without a move of 1% in either direction, the longest streak since January, according to Dow Jones Market Data. It is also only the fifth time in the past five years the measure has posted a such a streak for longer than 50 sessions.

Consistent corporate profits coupled with robust economic growth has placated investors. Analysts estimate third-quarter earnings by companies in the S&P 500 will increase by 20% from a year earlier. That would be the third-fastest quarterly growth rate ever, trailing only the two previous quarters, according to FactSet. And the U.S. economy expanded at a rate of 4.1% in the second quarter, the quickest pace in nearly four years.

Because major indexes have been unusually calm lately, sudden outsize market moves during the blackout period could sour investor sentiment toward stocks, some analysts say. That occurred when the market tumbled in February.

With roughly 20% of the S&P 500 already unable to buy back shares, the U.S. announced new tariffs on about $200 billion in Chinese goods late Monday. Beijing responded with duties on $60 billion of U.S. products.

The stock market actually rose after news of the new levies this week, as the tariffs taking effect later this month were less stringent than many investors had feared. But some analysts expect trade anxiety to build ahead of planned November meetings between President Trump and Chinese leader Xi Jinping. Both countries have laid out plans to end their monthslong tariff fight before those meetings.

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.

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, which itself has driven nearly a quarter of the increase in share repurchases this year.

But after weeks of a quiet trading, others believe a quick pickup in volatility could cause investors to reassess the market backdrop.

--Michael Wursthorn contributed to this article.

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

(END) Dow Jones Newswires

September 19, 2018 02:47 ET (06:47 GMT)

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