A Stock Market Buyback Blackout Could Spark a Decline as Earnings Season Begin

Strategists at Deutsche Bank have warned that a "blackout" period for stock buybacks ahead of the earnings season could trigger another short-term pullback following recent all-time highs for the S&P 500 and Nasdaq Composite. This caution comes from Parag Thatte and Binky Chadha, who highlighted in a Monday note that large buybacks, driven by strong earnings and amounting to an annual rate of $1 trillion, will temporarily decline as companies enter blackout periods before reporting their Q2 earnings.

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The strategists estimate that by the end of the next week, companies representing nearly half of the S&P 500 market cap will be in blackout periods. Most publicly traded companies enforce a blackout policy that restricts trading in shares starting two weeks before the end of the quarter and lasting until a day or two after earnings are released.

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Historically, blackout periods have impacted market performance. For instance, the blackout period before the first-quarter earnings season in April was cited as a factor in the modest pullback of the S&P 500 during that month. In early April, Deutsche Bank strategists had already cautioned that a seasonal slowdown in equity flows and a temporary reduction in buybacks could make the market susceptible to downside shocks.

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Moreover, long positions in the equity market have significantly increased, nearing the top of the long-run band and currently sitting at the 95th percentile. This positioning is slightly above the level implied by earnings growth and comes at a time when macroeconomic data has been more frequently disappointing, in contrast to April when data surprises were largely positive.

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The strategists believe the conditions are set for another market pause. They cite concerns across all three elements of their demand-supply framework: a sharp but narrow increase in positioning driven by the tech sector, rising risk appetite leading to substantial equity inflows that now seem overstretched, and the temporary reduction in buybacks due to upcoming blackout periods ahead of the Q2 earnings season.

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The S&P 500 and Nasdaq Composite had rallied to record highs in June but experienced modest setbacks at the end of last week and Monday, largely due to faltering shares of Nvidia Corp., a key player in the tech-focused market advance. Despite this, Nvidia and the indexes saw a bounce back on Tuesday.

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Comparatively, the Dow Jones Industrial Average has underperformed the other major indexes, gaining less than 4% in 2024 compared to the over 14% and 18% increases for the S&P 500 and Nasdaq, respectively.

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In summary, Deutsche Bank strategists anticipate that the upcoming blackout period for stock buybacks could lead to a short-term market pullback. They emphasize that while long-term buyback trends are supported by strong earnings, the near-term decline in discretionary buybacks and other market conditions could introduce volatility. As companies enter blackout periods ahead of their Q2 earnings reports, the market may experience temporary pressure, particularly given the current high levels of equity positioning and mixed macroeconomic data.

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