Deutsche Bank strategists warned this week that as earnings season approaches, share buybacks entering a 'quiet period' may lead to a short-term pullback in the S&P 500 index and the Nasdaq Composite index after setting new record highs.
Strategists Parag Thatte and Binky Chadha wrote in a report on Monday: "Strong earnings continue to provide strong support for the massive $1 trillion annual share buyback. However, in the short term, buybacks that are freely decided by management will decrease as companies enter the quiet period before the release of second-quarter earnings reports. We estimate that by the end of next week, almost half of the companies representing the S&P 500 index market cap will enter the quiet period." (see below)
Most listed companies have a quiet period policy that prohibits trading of stocks two weeks before the end of the quarter until the day or two after the financial report is released.
Strategists from Deutsche Bank and other analysts pointed out that the quiet period before the first quarter earnings season in April was one of the factors that led to a slight pullback in the S&P 500 index that month. The bank's strategists warned in early April that the seasonal slowdown in equity flow and the temporary reduction in buybacks could make the market susceptible to downward pressure.
At the same time, bullish positions in the stock market have "dramatically increased," approaching but not yet reaching the top of the long-term range, strategists said. Currently at the 95th percentile.
This positioning is only slightly higher than what profit growth implies, but appears different from the strong positive surprise in April data in the event that macro data provides more downward surprises.
Strategists said they see "conditions in place for another correction, with concerns that cover all three elements of our demand-supply framework: a sharp but narrow jump in tech-driven positions, near-historic highs; rising risk appetite triggering a surge in equity inflows, but now looking stretched; and the temporary reduction in buybacks reappearing as we enter the second-quarter earnings pre-quiet period next week."
Led by Nvidia, the S&P 500 index and the Nasdaq Composite Index hit a series of records in June before a slight pullback over the weekend and on Monday. Nvidia and the index rebounded on Tuesday.
The Dow Jones Industrial Average (DJIA) has lagged behind other major indexes, rising less than 4% so far in 2024, compared with more than 14% and 18% for the S&P 500 index and the Nasdaq index, respectively.
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