Companies are likely to continue reinvesting in growth opportunities, but the strategists see the bulk of incremental profits going to stock buybacks. “After a record year for buybacks in 2018, this year should be even higher at ~$850b, which would alone drive EPS growth of ~2%. This view is supported by record buyback announcements YTD of $213b led by Tech ~$46b and Industrials ~$40b,” they noted.
There are also existing buyback authorizations that have not been realized yet of about $700 billion, as of the fourth quarter. Companies also still have excess cash of about $1.5 trillion, excluding financial companies, the strategists added. They also expect operating cash flow to be the predominant source for capital return, with debt-funded buybacks now at just 14% after having peaked in 2017 at 34%.
They also expect fewer negative surprises related to trade and tariffs during the first-quarter reporting period. Technology companies, household products retailers, capital goods companies and automakers all discussed trade last quarter.
“While trade and tariffs remains a headwind for margins, companies are softening the drag by raising prices where possible, idling and shifting production to geographies unaffected by tariffs, and/or passing cost to suppliers. If a trade deal were to materialize, it could be a source of positive revisions (mainly through margins) since this catalyst is mostly not in consensus numbers,” the analysts noted. “Goods producers will increasingly highlight rising commodity prices as a risk; however, we expect the majority of the headwind to be passed down to end users given expanding labor markets and reaccelerating global growth.”
The strategists said they remain overweight cyclical sectors, including technology, consumer discretionary, industirals and energy. They see energy as having the best risk-reward with stock prices decoupled from oil prices, and positive guidance should help the sector’s earnings momentum.