It's really hard to beat the market, plus earnings season, stock buybacks, and geographic revenue exposure
It's really hard to beat the market, plus earnings season, stock buybacks, and geographic revenue exposure
The Sandbox Daily (3.7.2024)
Welcome, Sandbox friends.
Today’s Daily discusses:
active managers underperform, again
earnings season takeaways
stock buybacks, by the numbers
S&P 500 geographic revenue exposure
Let’s dig in.
Markets in review
EQUITIES: Nasdaq 100 +1.56% | S&P 500 +1.03% | Russell 2000 +0.81% | Dow +0.34%
FIXED INCOME: Barclays Agg Bond +0.21% | High Yield +0.12% | 2yr UST 4.503% | 10yr UST 4.087%
COMMODITIES: Brent Crude +0.19% to $83.12/barrel. Gold +0.40% to $2,166.9/oz.
BITCOIN: +1.48% to $67,439
US DOLLAR INDEX: -0.54% to 102.807
CBOE EQUITY PUT/CALL RATIO: 0.83
VIX: -0.41% to 14.44
Quote of the day
“You'll get nowhere buying stocks just because they have a great story.”
- Jim O’Shaughnessy
Active managers underperform, again
Each year, S&P Dow Jones Indices publishes the SPIVA Scorecard that compares actively managed funds against their appropriate benchmarks to better understand the performance of investment managers.
Two common themes have emerged over time:
Actively managed funds have historically tended to underperform their benchmark over short- and long-term time horizons.
Even when a majority of actively managed funds in a category have outperformed the benchmark over one time period, they have usually failed to outperform over multiple time periods.
2023 was no different: 60% of all active large-cap U.S. equity funds underperformed the S&P 500. This was just below the 64% average underperformance rate over the 23-year history of SPIVA Scorecards.
International equities fared even worse, where 74% of funds in the Global category underperformed.
In bond land, fixed income results showed an underperformance rate of 59% across all fund categories.
The continued underperformance delivered by active managers further illustrates the challenges of outperforming the market on a consistent basis.
Source: S&P Dow Jones Indices
Earnings season takeaways
With the U.S. earnings season mostly behind us, what do we know?
98% of the S&P 500 index has reported 4th quarter results and we have +8% earnings growth YoY, with actual results beating estimates by 7% – both measures more or less in line with 20-year averages. That’s good news after the earnings recession in late 2022 and 2023.
Looking ahead to the full-year 2024 outlook, a much smaller proportion of companies are raising EPS guidance, well below the historical median. Not such good news.
With stocks at highs, some are prescribing risk assets as priced to perfection – in other words, reflecting little risk to earnings growth, margins, economic growth, etc. Looking at the longer-term history, there is no shortage of periods where stocks stayed overbought for long periods of time, however it’s quite possible the current environment continues to leave us vulnerable to a mis-step. Whereas the earnings growth of the Magnificent 7 has been +56%, the S&P 500-ex-Mag 7 saw earnings shrink by -2%. That means we have the uncomfortable choice of buying something already expensive albeit with good earnings growth (Mag 7), or something cheap, perhaps justifiably so with negative earnings growth (SPX-ex-Mag 7).
Source: J.P. Morgan Markets
Stock buybacks, by the numbers
Stock buybacks, the process in which a company buys back its own shares in the open market, are making a comeback now that companies are feeling more confident about the future.
After falling 14% in 2023, Goldman Sachs expects U.S. share buybacks to total $925 billion in 2024 (13% YoY growth) and exceed $1 trillion (16% YoY growth) for the 1st time in 2025, driven by strong earnings growth from technology companies and looser financial conditions as the Federal Reserve looks to cut interest rates.
Stock buybacks have been on a bit of a roller coaster over the last couple years.
After crashing in 2020 during the onset of the COVID-19 pandemic, share repurchases exploded in growth in 2021 before leveling off and collapsing again in 2022-2023 as C-Suites across America prepared for the recession that never came.
Information Technology and Communication Services will be the primary drivers of index level buyback growth.
Revenue growth for these sectors will be supported by strong consumer spending and increased demand for AI-related products.
Companies enter share repurchase programs to reduce the outstanding share count, return capital to shareholders in a tax efficient manner, boost key financial ratios, bolster the stock price, and offset share dilution through employee stock option grants.
Source: Goldman Sachs Global Investment Research
One simple graphic
Roughly 40% of the revenue generated by companies in the S&P 500 index comes from overseas.
Source: FactSet
That’s all for today.
Blake
Welcome to The Sandbox Daily, a daily curation of relevant research at the intersection of markets, economics, and lifestyle. We are committed to delivering high-quality and timely content to help investors make sense of capital markets.
Blake Millard is the Director of Investments at Sandbox Financial Partners, a Registered Investment Advisor. All opinions expressed here are solely his opinion and do not express or reflect the opinion of Sandbox Financial Partners. This Substack channel is for informational purposes only and should not be construed as investment advice. The information and opinions provided within should not be taken as specific advice on the merits of any investment decision by the reader. Investors should conduct their own due diligence regarding the prospects of any security discussed herein based on such investors’ own review of publicly available information. Clients of Sandbox Financial Partners may maintain positions in the markets, indexes, corporations, and/or securities discussed within The Sandbox Daily. Any projections, market outlooks, or estimates stated here are forward looking statements and are inherently unreliable; they are based upon certain assumptions and should not be construed to be indicative of the actual events that will occur.