2020 In With A Whimper, Out With A Bang – Equity Bulls Have High Hopes For 2021

Historically, foreigners’ purchases – or a lack thereof – and the S&P 500 tend to move hand in hand.

In January 2018, their 12-month purchases peaked at $135.6 billion (blue vertical line in Chart 4). The S&P 500 suffered down months in February and March that year, before stabilizing. But foreigners kept reducing exposure. By April 2019, they had net-sold $214.6 billion in 12 months – a record (orange vertical line); by December that year, they had turned into net purchasers, and kept buying even when others were massively liquidating in February and March last year. They were right to do so.

Bulls hope this aggression on the part of foreigners continues.

In fact, foreigners, along with margin debt, helped fill a large vacuum left by corporate buybacks.

In 4Q18, S&P 500 companies spent $223 billion in buybacks – a record. Along with $119.8 billion in dividends, the $293.8 billion in operating earnings in that quarter was easily outspent. The blistering pace was simply unsustainable. In 2Q20, buybacks were down to $88.7 billion – an eight-year low – with $101.8 billion in 3Q20. The four-quarter total of $570.8 billion in 3Q20 was an 11-quarter low. This compares with a record $823.2 billion spent in the four quarters through 1Q19 (Chart 5).

The point is, from a massive tailwind at one time, buybacks have turned into a headwind. It is hard to imagine them regaining their old glory anytime soon, but they can at least stabilize. As a matter of fact, if S&P 500 earnings come anywhere close to what they are expected to earn this year, the pace of buybacks likely picks up steam.

The sell-side has high expectations this year. Operating earnings for S&P 500 companies are expected to surge 36.7 percent from the consensus $120.25 in 2020.

Last March, this year’s estimates were as high as $183.37 before these analysts brought out their scissors. Estimates bottomed at $160.89 mid-July. The upward revision trend that followed peaked mid-December at $166.63, before ending the year at $164.40.

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This blog is not intended to be, nor shall it be construed as, investment advice.  Neither the information nor any opinion expressed here constitutes an offer to buy or sell any security or ...

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