Could a pullback in buybacks mean a pullback for stocks?
Stock buybacks in the first quarter of 2014 were the second largest on record. That helped boost earnings per share—and thus stock prices—at a time when net income growth was otherwise lackluster.
However, buybacks in the second quarter are expected to have been down by about 30 percent compared with the first quarter, according S&P Dow Jones Indices. So will a retreat in buybacks signal a retreat for stocks?
Not if one market player is right. David Seaburg, head of equity sales trading at Cowen and Co., believes revenue growth will kick in and save the day for stocks.
“We’re sort of in the ‘show me’ stage, passing the baton from the cheap money that allowed buybacks to really showing top-line growth,” said Seaburg. “Once we start to see the top-line growth pick up a little bit, investors really get comfortable with that. You’re going to see the market continue to grind higher.”
Some sectors such as tech are seeing revenue growth move faster, notes Seaburg. But he thinks it will take a little bit of time before the market really picks up on it.
“I’m positive for the market,” he said. “I think we trade sideways a little bit for the near term and then we actually continue on our upward trajectory. I do think that the buybacks will be offset by top-line growth.”
Ari Wald, head of technical analysis at Oppenheimer & Co., agrees with Seaburg’s assessment of both the near and longer term.
“Aside from what could be some near-term consolidation in the market—we move sideways—we think the longer-term path is still higher,” said Wald. “We think the S&P 500 ends up making new highs. And we think after a 3 ½ percent pullback last week, a lot of that downside may already be exhausted.”
Wald is looking at 1,900 as a support level for the S&P 500. He believes those who missed the rally after the index broke above that level in May will jump in. Should 1,900 fail to hold, the next support Wald sees is right around 1,860 where the 200-day moving average is.
“These levels would represent about a 4 to 6 percent pullback for the S&P 500 from its peak,” Wald said. “Looking back at the last 18 months, we’ve had these 4 to 6 percent pullbacks. That’s healthy. I think we’re almost there. I think you buy weakness and longer-term trends are still healthy. “
To see the full discussion on the S&P 500, with Seaburg on the fundamentals and Wald on the technicals, watch the above video.