The current stock market tumult should ease once companies accelerate the repurchase of their own shares, according to a Deutsche Bank analysis.
Major indexes fell back to around correction territory Monday thanks to a pullback in tech stocks, which have served as one part of a multi-pronged set of market obstacles over the past two months or so.
While the market is likely to face a continued run of headline risk, the willingness of companies to step in and buy back their own shares could serve as a substantial price floor amid the increased volatility.
“We expect the market to remain choppy until a sufficient number of firms to report and the corporate buyback bid gets back up to full steam,” Binky Chadha, chief strategist at Deutsche Bank Research, said in a note to clients.
Deutsche predicts S&P 500 company buybacks to total $650 billion, which it said would amount to a 33 percent increase from 2017. (Expectations are high all around for repurchases, with J.P. Morgan Chase putting the 2018 forecast at $800 billion.)
Just by itself, the Deutsche forecast would imply a 12 percent full-year gain for the index, getting it to Deutsche’s 3,000 price target by the end of 2018. The price target indicates 16 percent upside from the index’s level at midday trading Monday.
Buybacks serve as one of four catalysts that Chadha sees pushing the market higher, with the other three being benefits from the sharp cut in corporate income taxes, an increase in government spending generally and defense specifically, and the ability of companies to expense capital expenditures at an accelerated level.
In addition, expected interest-rate hikes also could have a benefit in that they eventually will find their way to savings, providing a boost in income for U.S. households that are holding some $11 trillion in cash, Chadha said.
“We see Fed hikes once they pass through to deposit rates as providing a sizable boost to household income,” he wrote. “So growth could get a lot stronger.”