Breakdown in Mega-Cap Growth Confirms Bear Phase

KEY

TAKEAWAYS

  • Early breakdowns from AAPL and TSLA provided initial warnings of a late stage bull market.
  • Exponential gains in stocks like SMCI and MSTR have now turned into steep pullbacks with both stocks breaking below moving average support.
  • With AMZN and NFLX finishing the week below their 50-day moving average, the rotation away from growth leadership may now be in full force.

While our major equity benchmarks showed incredible strength in Q1 2024, breadth conditions have been deteriorating since mid-March. Despite the weakening breadth readings, and the initial breakdowns of the S&P 500 and Nasdaq 100, leading growth names, including the formerly-described Magnificent 7 stocks, had remained in clearly-defined uptrends.

This week, some of the top-performing stocks in the S&P 500 finally broke below their 50-day moving averages. While this signal on its own is not a sign of a market top, these breakdowns represent just one of the many clear signals that the bull market off the October 2023 low may be over.

Today, we’ll briefly review some of the early breakdowns in the mega-cap growth space, how some of the top-ranked SCTR stocks have shown recent weakness, and why the “Fantastic Four” (current front-runner to replace the “Magnificent 7 moniker) breaking down may represent a key confirmation for a new bear phase.

The Early Breakdowns: Apple (AAPL) & Tesla (TSLA)

Tesla has been in a confirmed downtrend since July 2023, and Apple has appeared in a weak technical configuration since failing to break above the $200 level in December and January. But both charts have literally and figuratively made a new low this week.

Note how both charts have remained below downward-sloping 50-day moving averages since mid-January. Also observe how both have shown failed attempts to break above that moving average in recent months. When stocks are making lower lows and lower highs, and trending below downward-sloping moving averages, I’ve learned it’s best to avoid taking action until some of those conditions start to change. 


Ready to talk market breadth indicators? Our next free webinar, Breaking Down Breadth, will focus on breadth conditions now vs. previous market tops. Join me on Tuesday, April 23rd at 1pm ET as we review the current market environment through the lens of breadth indicators, compare them to conditions at previous market tops, and discuss the likelihood of further drawdowns for the S&P 500 and Nasdaq. Sign up HERE for this free webcast!


As these stocks broke down, diverging from most other leading growth names, the S&P 500 and Nasdaq 100 pushed much higher. So let’s see some of the stocks that served as leadership in Q1.

The Top-Ranked SCTRs: Super Micro Computer (SMCI) & MicroStrategy (MSTR)

Here, we have two names that were less well-known until they experienced exponential gains earlier this year. And while they certainly appeared overextended in March, they have now both come right down to earth.

From the end of 2023 to their peaks in March 2024, SMCI and MSTR gained 350% and 175%, respectively. They both were a far distance from moving average support, giving clear signs of overbought conditions. So far in April, both stocks have traded much lower, and they each finished this week below their 50-day moving averages.

It’s normal for stocks in strong uptrends to pull back and test moving average support. Indeed, the 50-day moving average often serves as a potential entry point for a “buy on the dips” strategy. But when top performers fail to hold this crucial short-term support level, I have found that it often implies a broader move to more risk-off positioning.

What about the best of the biggest–in other words, the most magnificent of the Magnificent 7?

The Fantastic Four Breakdowns: Netflix (NFLX) & Amazon (AMZN)

That brings us to perhaps the most concerning development this week. As I recently posted on my social media accounts, “As long as $AMZN and $NFLX remain above the 50-day moving average, you can make an argument for ‘short-term pullback’ as opposed to ‘protracted and painful decline.'” Unfortunately, this week, we finally observed this breakdown of breakdowns.

Mega-cap growth stocks wield an outsized influence on our top-heavy growth-dominated equity benchmarks. In recent weeks, bearish momentum divergences, weakening breadth conditions, and breaks of “line in the sand” support levels had us thinking market weakness over market strength. But the resilience of the Fantastic Four stocks gave us just a glimmer of hope that a pullback may be limited.

Given this week’s breakdown in the charts of previous top performers, we feel this just may be the beginning of the great bear phase of Q2 2024.

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!


David Keller, CMT

Chief Market Strategist

StockCharts.com


Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
Learn More

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#Breakdown #MegaCap #Growth #Confirms #Bear #Phase

Lagging Indicators Confirm Bearish Phase For Growth

KEY

TAKEAWAYS

  • Leading indicators help anticipate price reversals, while lagging indicators validate trend changes you’ve already observed.
  • RSI combines the qualities of leading and lagging indicators, helping investors to prepare for and react to trend reversals.
  • AAPL recently showed a bullish momentum divergence, meaning the leading indicator has triggered and now it’s all about the confirmation.

I have found that novice investors think of technical analysis as fairly homogeneous. At the end of the day, technical indicators are just basically analyzing price patterns, right?

Technical analysis is actually comprised of a fairly diverse set of tools to help investors understand investor sentiment by analyzing price and volume trends. While the common thread for technical analysis is a focus on the markets themselves (through price and volume) as opposed to factors that often influence market activity (for example, fundamental or macroeconomic analysis), it turns out that there are many different ways to quantify investor sentiment through charts.

In this article, we’ll talk about two main categories of technical indicators, how leading and lagging indicators represent different approaches to price analysis, and how we can apply these concepts to the current chart of Apple Inc. (AAPL).

Leading vs. Lagging Indicators

I like to classify technical indicators into general buckets: leading indicators, which are designed to anticipate a change in trend, and lagging indicators, which are more confirmational and tell you when a trend has actually reversed.

These two categories remind me of the broader labels of growth vs. value investing.  Growth investors tend to buy strong companies in the hope that they will continue to grow earnings over time. Value investors, on the other hand, tend to invest in companies trading for less than what they are worth based on some valuation assessment.

There isn’t necessarily a “right” or “wrong” way to invest, but there are different periods where growth or value approaches will tend to be more successful. The same can be said for the different types of technical indicators, and, for many investors, a balance of leading and lagging investors is probably the best approach.

I tend to favor lagging indicators in my own technical work, although I do employ some leading indicators as well. One indicator in particular, the Relative Strength Index (RSI), combines both leading and lagging capabilities to help define the trend and recognize trend shifts.

RSI as a Leading and Lagging Indicator

Toward the end of a bullish phase, the price will often continue higher, while a momentum indicator like RSI actually rotates lower. This indicates a lack of upside momentum and indicates that the uptrend may be nearing its end. This is where RSI can help anticipate potential turning points, as the signal occurs while the current trend is still in place.

Let’s review the chart of Apple going into its July high.

Note the consistent uptrend that began in January, providing a sudden reversal from a bearish Q4 2022. When AAPL made another new high in late June, the RSI spiked up to almost 80. During subsequent price highs in mid- and late-July, the RSI peaked around 70 and 65, respectively.

This “bearish momentum divergence” suggested that while the price of Apple was still going higher, the bullish momentum propelling the price action was beginning to dissipate. Sure enough, AAPL gapped down below its 50-day moving average soon after, beginning a bearish phase that may still be in place today.

RSI can also be used as a lagging or trend-following indicator, designed more to validate a potential price reversal you’ve already observed. Notice how, during the first half of 2023, the RSI remained in the 40 to 80 range? This range is more characteristic of a bullish trend than a bearish trend.

Now look at how the entire range of the RSI pushed lower starting in August, with the RSI now rotating between 20 and 60. This shift to a more bearish range could have helped a savvy investor rotate to more defensive positioning.

Outlook for AAPL

Since the July peak, Apple has now entered a downtrend comprised of lower highs and lower lows. The RSI became oversold during the August low, but was not oversold at the September low. Now we are observing a bullish momentum divergence, providing a leading indicator of a potential change in trend.

Considering the weight of the evidence, I’m seeing the price in a clearly defined downtrend channel. The low in September came at a confluence of support, just above the 200-day moving average and right around the 38.2% Fibonacci level. Now the stock is giving a second attempt at pushing above the 50-day moving average, after an unsuccessful attempt in late August.

While the RSI divergence tells me to be ready for a reversal, the clearly defined downtrend in price on weak momentum compels me to remain on the sidelines. A break below that confluence of support around $168-170 would validate the bearish thesis and suggest further downside into year-end 2023. 

As a trend-follower, I have always felt that my main goals are threefold:

  1. Define the trend
  2. Follow that trend
  3. Anticipate when the trend is exhausted

By combining both leading and lagging technical indicators into your toolkit, you will be best prepared for changing market environments and trend reversals!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!


David Keller, CMT

Chief Market Strategist

StockCharts.com


Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
Learn More

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#Lagging #Indicators #Confirm #Bearish #Phase #Growth

Q4 Stock Market Outlook: 3 Analysts, 3 Insights

KEY

TAKEAWAYS

  • Although September is considered a seasonally weak period for the stock market the fourth quarter is typically a strong period
  • There’s a high probability of the S&P 500 Index reaching a new high in Q4
  • Growth stocks, Industrials, Financials, and Commodities could all see positive movement in Q4

Traders and investors don’t generally look forward to September. Besides being the end of summer vacations and back-to-school season, the stock market usually hits its weakest point at this time of the year. But that doesn’t necessarily mean you should stay away from the stock market in September.

If you patiently wait for the pullback to unravel, it could present investment opportunities for the last quarter of the year. And given that 2023 is a pre-election year, it’s usually a strong one for equities. But which market segment should you invest in, and which ones should you stay away from? 

In a recent StockCharts TV episode of Charting Forward, recorded on September 12, 2023, Chief Market Strategist of StockCharts.com, David Keller, CMT, spoke with the following three technical analyst veterans:

  • Mish Schneider, Director of Trading Education at Market Gauge
  • Tom Bowley, Chief Market Strategist of EarningsBeats.com
  • Julius de Kempenaer, Creator of Relative Rotation GraphsⓇ and Senior Analyst at StockCharts.com 

In it, the group discussed how the broader market went through a pullback in August, but has since recovered. Given September is considered a weak month, does that mean the stock market could see another pullback before moving back up? Which areas of the market are likely to perform well, and which ones are likely to be the laggards in Q4? Let’s find out.

“I’m not as bearish as I should be. The risk factors we look at say “risk-on” is the way to go.” —Mish Schneider

So, assuming nothing out of the ordinary happens, Mish’s outlook is positive. The stock market has remained strong despite rising interest rates, inflationary pressures, and rising oil prices. When the stock market is trending higher, there’s no reason to fight that trend.

“We are in the summer doldrums and could see one more drop before going higher. But I’m also bullish.” —Tom Bowley

Earlier in the year—mid-July—sentiment indicators showed bearish signs, and some negative divergences were emerging in the broader indexes. But that has reversed.

“If you look at a daily chart of the S&P 500 ($SPX), there is a series of higher highs and higher lows since the August pullback. I wouldn’t be surprised if the S&P 500 exceeds 4600 in Q4.” —Julius de Kempenaer

Well, you can’t argue there. The way things are now (short of systematic risk hitting the market), the stock market seems to be hanging in there. It’s almost as if it’s waiting for a catalyst to push it higher. 

The pullback of the Magnificent Seven stocks was healthy and perhaps a much-needed one. Apple (ticker symbol: AAPL) hit a rough patch when China restricted the use of the iPhone. But if you look at a daily chart of AAPL (see below), it doesn’t paint a doom-and-gloom picture.

CHART 1: DAILY CHART OF APPLE, INC. Although Apple’s stock price faced some pressure, it still didn’t take out its August low.Chart source: StockCharts.com. For educational purposes.

The stock hasn’t taken out its August 18 low of $172 and could potentially reverse. If a hard-hit stock isn’t looking bearish, is there any reason for investors to question the strength of the equity market?

What Could Go Wrong

For Mish, it would be the retail space. Consumer behavior is strongly correlated with the health of the US economy. And if consumers cut back on their spending, which is possible when inflationary pressures are ubiquitous and interest rates are high, it could add some stress to the broader market.

So far, there are no signs of a drop in retail sales. August retail sales were up 0.6% month over month—higher than the 0.1% increase expected by economists. A large part of that rise can be attributed to higher gasoline prices. If you strip away auto and fuel from the data, retail sales rose by a mere 0.2%. This could indicate that consumers may face pressure, so it’s best to keep an eye on the retail sector by closely watching the SPDR S&P Retail ETF (XRT).

CHART 2: THE RETAIL SECTOR HELPS GAUGE CONSUMER SENTIMENT. The August high didn’t come close to its February high. Does that mean retail spending could decline in the near future?Chart source: StockCharts.com. For educational purposes.

One interesting point Mish made was that the uptrend in XRT from June to July (2023) didn’t come close to the February 2023 high. And even though XRT saw a jump due to the positive retail sales number, there’s no sign of an uptrend—higher highs and higher lows.

Rising oil prices could put pressure on the equity market. While energy stocks are rising, Julius points out that other sectors, such as Consumer Discretionary, Technology, and Communication Services, are getting ready to gain strength. It’s likely the Magnificent Seven will take the lead again, which is encouraging, given that the Energy sector is looking overbought.

Sector Relationships Are Important

Relationships between sectors often hold the key to future market action. Tom Bowley pays close attention to the relationships for warning signs. What you hear in the media may not appear on the charts. So, what are the charts indicating?

“In addition to Consumer Discretionary and Technology, Industrials and Financials tend to perform well during Q4,” said Tom. So keep an eye on the chart of the Industrial Select Sector SPDR Fund (XLI) and the Financial Select Sector SPDR (XLF). The daily chart of XLF below shows the ETF bouncing off its 50-day simple moving average.

CHART 3: DAILY CHART OF THE FINANCIAL SELECT SECTOR SPDR (XLF). The Financial sector could perform well in Q4. The ETF appears to be bouncing off its 50-day simple moving average.Chart source: StockCharts.com. For educational purposes.

Another sector to watch is Materials. Besides production cuts, Mish feels that the rise in oil prices has to do with shortages. Because of this, we could see a boom in commodities. “Commodities have started to bottom and are picking up steam,” added Julius.

Many say, “This time, it’s different.” And there’s some truth to that. When considering buying a stock, there are many factors to analyze. For example, we’re in a high-interest rate environment, which generally hurts growth stocks. But we haven’t seen that.

“Interest rates are only one part of the equation,” mentioned Tom. So, if growth is strong, you can expect growth stocks to continue rising.

The Bottom Line

So all three analysts had a similar opinion of the overall direction of the broader market. However, each had unique perspectives in their analysis. For additional insights on cryptocurrencies, sectors likely to outperform or underperform, and which stocks or charts to watch in Q4, check out the video (link at the bottom of this article). 

We’re approaching the second half of September, which is typically the worst part of the month. But the broader indexes are showing bullish signs. Even hotter-than-expected inflation numbers didn’t spark a selloff. There’s still a Fed meeting later this month, but the chances of Fed Chairman Powell making any comments that may cause the market to sway significantly in either direction are slim. Will September’s performance be different this year?


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#Stock #Market #Outlook #Analysts #Insights

Which is More Likely — SPX Over 4600 or Below 4200?

KEY

TAKEAWAYS

  • Top investors use probabilistic analysis to think through different scenarios to determine which appears the most likely.
  • By thinking through each of four potential future paths for the S&P 500, we can be better prepared for whichever scenario actually plays out in the coming weeks.

We are now in the seasonally weakest part of the calendar year. The summer doldrums often lead to a meaningful pullback in the third quarter, and 2023 has, so far, not disappointed by following the seasonal tendencies quite well.

The month of August saw leading names like Apple (AAPL) and Microsoft (MSFT) pull back from new highs, causing many investors to rethink the “2023 is going to go up all year” thesis. So now that we’ve experienced an initial drop, what’s next for the S&P 500?

Today we’ll revisit the concept of “probabilistic analysis”, where we lay out four different potential scenarios for the S&P 500. There are three things I hope you take away from this exercise.

  1. It’s important to have a thesis as to what you think will come next for stocks. This should be based on a meaningful combination of four key pillars: fundamental, technical, macroeconomic, and behavioral. And your portfolio should be positioned to reflect what you see as the most likely outcome.
  2. It’s also important to consider alternative scenarios. What if the market is way more bullish than you’d expect? What if some five-standard-deviation event pops up, and stocks suddenly drop 20 percent? The best way to break out of your predetermined biases is to actively consider alternative points of view.
  3. It’s incredibly important to think about how you would adapt to one of those alternate scenarios. How would your portfolio perform in a risk-off environment in the coming months? Are you prepared for a sudden spike in risk assets, and at what point would you need to change your positions to match this new reality?

I have found that the most successful investors don’t know all the answers, but they ask the best questions. So let’s broaden our horizons a bit, and consider four potential future paths for the S&P 500 over the next six to eight weeks. But first, we’ll review the recent pullback for the major equity averages.

A brief seasonality check on the S&P 500 will show that August and September tend to be quite weak for the main US equity benchmark. So the drop we saw in early August actually follows the seasonal playbook quite well, as would further weakness in September.

We’ve been thinking about the possibility of a much deeper correction for risk assets, and it’s a distinct possibility that we’re now in an A-B-C pullback, which would take us to a new swing low right around options expiration in the third week of September. But at the same time that charts like LVS are displaying classic topping patterns, we can’t help but notice that stocks like Alphabet (GOOGL) appear to be firmly entrenched in a protracted bullish phase.

An uptrend is defined by a persistent pattern of higher highs and higher lows, and GOOGL certainly seems to be displaying that classic bullish phase quite well. How bearish do you want to be when Alphabet is just pounding higher month after month?

With our benchmarks pulling back and breadth conditions deteriorating, as well as key growth stocks like GOOGL still holding above support, let’s lay out four potential scenarios for the S&P 500 over the next six-to-eight weeks. And remember the point of this exercise is threefold:

  1. Consider all four potential future paths for the index, think about what would cause each scenario to unfold in terms of the macro drivers, and review what signals/patterns/indicators would confirm the scenario.
  2. Decide which scenario you feel is most likely, and why you think that’s the case. Don’t forget to drop me a comment and let me know your vote!
  3. Think about each of the four scenarios would impact your current portfolio. How would you manage risk in each case? How and when would you take action to adapt to this new reality?

Let’s start with the most optimistic scenario, involving a strong summer push for stocks.

Scenario #1: The Very Bullish Scenario

What if the pullback of the next five weeks is over, and the market goes right back to a full risk-on mode? Stocks like AAPL and MSFT would most likely return back to test new highs and interest rates would probably come down enough, as economic data continues to show at the Fed’s efforts have successfully slowed down the economy.

This Very Bullish Scenario would mean a break above 4600, and when we revisit the chart in late September, we’re talking about the possibility of new all-time highs for the S&P 500 and Nasdaq in October.

Scenario #2: The Mildly Bullish Scenario

Markets can correct in two ways: price and time. A price correction (see February 2023) involves the chart moving lower quickly as the market quickly sheds value. A time correction (see April-May 2023) means there’s not much of a price drop, and the “correction” is more of a pause of the uptrend.

There’s a possibility that the July high around 4600 still holds as resistance, and a time correction keeps the S&P 500 in the 4300-4600 range. Keep in mind that there are plenty of opportunities for sectors like Energy to thrive in a sideways market, but the major indexes don’t make any headway in either direction.

Scenario #3: The Mildly Bearish Scenario

What if the A-B-C correction outlined above plays out, and the S&P 500 index pushes lower to retest the 200-day moving average? If interest rates remain elevated, and growth stocks continue to pull back, this would be a very reasonable outcome for the equity markets.

One of my mentors used to say, “Nothing good happens below the 200-day moving average.” The good news is the Mildly Bearish Scenario means we drop further from current levels, but still manage to find support at this important long-term barometer.

Scenario #4: The Super Bearish Scenario

This is where things could get really nasty. What if the market goes full risk-off, interest rates push higher, economic data comes in hotter than expected, and the Fed is forced to consider further rate hikes instead of debating when to ease monetary conditions?

This Super Bearish Scenario would mean the S&P 500 breaks down through 4300 and 4200, leaving the 200-day moving average in the rearview mirror, and in late September we’re debating whether the S&P 500 and Nasdaq will make a new low before year-end 2023.

Have you decided which of these four potential scenarios is most likely based on your analysis? Head over to my YouTube channel and drop a comment with your vote and why you see that as the most likely outcome.

Also, we did a similar analysis back on the S&P 500 back in June. The “mildly bullish” scenario ending up matching the market action pretty closely. Which scenario did you vote for?

Only by expanding our thinking through probabilistic analysis can we be best prepared for whatever the future may hold!

RR#6,

Dave

P.S. Ready to upgrade your investment process? Check out my free behavioral investing course!


David Keller, CMT

Chief Market Strategist

StockCharts.com


Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.

The author does not have a position in mentioned securities at the time of publication. Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.

David Keller

About the author:
David Keller, CMT is Chief Market Strategist at StockCharts.com, where he helps investors minimize behavioral biases through technical analysis. He is a frequent host on StockCharts TV, and he relates mindfulness techniques to investor decision making in his blog, The Mindful Investor.

David is also President and Chief Strategist at Sierra Alpha Research LLC, a boutique investment research firm focused on managing risk through market awareness. He combines the strengths of technical analysis, behavioral finance, and data visualization to identify investment opportunities and enrich relationships between advisors and clients.
Learn More

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#SPX

Bank of America execs blew $93.6 billion. Here’s how they did it.

In several notes to clients this month, Odeon Capital Group analyst Dick Bove has pointed out that Bank of America’s big spending on stock buybacks over the past five years has been a waste for its shareholders, with the bank’s stock price declining slightly during that period.

The idea behind repurchasing shares on the open market is that they reduce a company’s share count and therefore boost earnings per share and support higher share prices over time. This doesn’t seem to be a bad idea, especially for a company such as Apple Inc.
AAPL,
+1.01%
,
which has generated excess capital and has appeared to be firing on all cylinders for a long time. For a company that is continuing to expand its product and service offerings while maintaining high profitability, buybacks can be a blessing to shareholders.

But for banks, for which capital is the main ingredient of earnings power, a more careful approach might be in order. The data below show how buybacks haven’t helped the largest banks outperform the broad stock market over the past five years. And now, banks face the prospect of regulators raising their capital requirements by 20%, according to a Wall Street Journal report.

Before showing data for the 20 companies among the S&P 500 that have spent the most money on buybacks over the past five years, let’s take a look at how share repurchases are described in a misleading way by corporate executives — and by many analysts, for that matter. During Bank of America’s
BAC,
-0.79%

first-quarter earnings call on April 18, Chief Financial Officer Alastair Borthwick said the bank had “returned $12 billion in capital to shareholders” over the previous 12 months, according to a transcript provided by FactSet.

Borthwick was referring to buybacks and dividends combined. Neither item was a return of capital. In fact, Bove summed up the buybacks elegantly in a client note on June 9: “The money that the company uses to buy back the stock is simply given away to people who do not want to own the bank’s stock.”

It is also worth pointing out that the term “return of capital” actually means the return of investors’ own capital to them, which is commonly done by closed-end mutual funds, business-development companies and some real-estate investment trusts, for various reasons. Those distributions aren’t taxed and they lower an investor’s cost basis.

Dividends aren’t a return of capital, either, if they are sourced from a company’s earnings, as they have been for Bank of America.

One more thing for investors to think about is that large companies typically award newly issued shares to executives as part of their compensation. This dilutes the ownership stakes of nonexecutive shareholders. So some of the buybacks merely mitigate this dilution. An investor hopes to see the buybacks lower the share count, but there are some instances in which the count still increases.

How buybacks can hurt banks

Banks’ management teams and boards of directors have engaged in buybacks because they wish to boost earnings per share and returns on equity by shedding excess capital. But Bove made another industry-specific point in his June 9 note: “If the bank buys back stock it must sell assets that offer a return to do so; it lowers current earnings.” Buybacks can also hurt future earnings. Less capital can slow expansion, loan growth and profits.

According to Bove, Bank of America CEO Brian Moynihan, who took the top slot in 2010 and saw the bank through the difficult aftermath of its acquisition of Countrywide and Merrill Lynch in 2008, “is one of the brightest, most capable executives for operating a banking enterprise.”

But he questions Moynihan’s ability to manage the bank’s balance sheet. Bove expects that Bank of America will need to issue new common shares, in part because rising interest rates have reduced the value of its bond investments.

In a June 5 note, Bove wrote: “Mr. Moynihan indicated twice [during a recent presentation] that the bank has excess cash that apparently could not be invested profitably. Possibly he is unaware that the cost of deposits at the bank in [the first quarter of] 2023 was 1.38% while the yield in the Fed Funds market can be as high as 5.25%.” In other words, the bank could earn a high spread at little risk with overnight deposits with the Federal Reserve.

That is a very simple example, but if Bank of America had grown its loan book more quickly over recent years while focusing less on buybacks, it might not face the prospect of a near-term capital raise, which would dilute current shareholders’ stakes in the company and reduce earnings per share.

Top 20 companies by dollars spent on buybacks

To look beyond banking, we sorted companies in the S&P 500
SPX,
+0.51%

by total dollars spent on buybacks over the past five years (the past 40 reported fiscal quarters) through June 9, using data suppled by FactSet. It turns out 11 have seen prices increase more quickly than the index. With reinvested dividends, 12 have outperformed the index.

Company

Ticker

Dollars spent on buybacks over the past 5 years ($Bil)

5-year price change

5-year total return with dividends reinvested

Apple Inc.

AAPL,
+1.01%
$393.6

279%

297%

Alphabet Inc. Class A

GOOGL,
+0.84%
$180.6

116%

116%

Microsoft Corporation

MSFT,
+0.87%
$121.5

221%

239%

Meta Platforms Inc.

META,
+1.58%
$103.4

42%

42%

Oracle Corp.

ORCL,
+6.11%
$102.6

140%

161%

Bank of America Corp.

BAC,
-0.79%
$93.6

-2%

10%

JPMorgan Chase & Co.

JPM,
-0.18%
$87.3

27%

47%

Wells Fargo & Co.

WFC,
-1.01%
$84.0

-24%

-13%

Berkshire Hathaway Inc. Class B

BRK.B,
-0.80%
$70.3

70%

70%

Citigroup Inc.

C,
+0.09%
$51.4

-29%

-16%

Charter Communications Inc. Class A

CHTR,
+1.09%
$48.5

20%

20%

Cisco Systems Inc.

CSCO,
+1.00%
$46.5

15%

34%

Visa Inc. Class A

V,
+0.75%
$45.6

66%

72%

Procter & Gamble Co.

PG,
-1.26%
$42.1

89%

116%

Home Depot Inc.

HD,
+1.01%
$41.0

51%

71%

Lowe’s Cos. Inc.

LOW,
+1.92%
$40.8

111%

131%

Intel Corp.

INTC,
+4.67%
$39.0

-40%

-31%

Morgan Stanley

MS,
+1.04%
$36.7

67%

93%

Walmart Inc.

WMT,
+0.33%
$35.6

82%

99%

Qualcomm Inc.

QCOM,
+2.12%
$35.1

101%

130%

S&P 500

SPX,
+0.51%
55%

69%

Source: FactSet

Click on the tickers for more about each company or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

The four listed companies with negative five-year returns are three banks — Citigroup Inc.
C,
+0.09%
,
Wells Fargo & Co.
WFC,
-1.01%

and Bank of America — and Intel Inc.
INTC,
+4.67%
.

Don’t miss: As tech companies take over the market again, don’t forget these bargain dividend stocks

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