S&P 500 Gains for Third Day, Posts Largest Three-Day Rally Since April

Stocks picked up where they left off on Friday, as investors continued to put growth fears behind them.

BRENDAN MCDERMID

The S&P 500 gained 0.9% to 1,904.04 today. That’s put it up the benchmark index up 2.2% during the past three days, its biggest three-day rise since mid-April.  The Dow Jones Industrial Average, meanwhile, ticked up 0.1% to 16,399.67 (click here to find out why it underperformed), the Nasdaq Composite rose 1.4% to 4,316.07 and the small-company Russell 2000 rose advanced 1.2% to 1,094.97.

Looking for a reason why the investors have set aside their doom & gloom in favor of a sunnier outlook? Beats me. Bloomberg cites better earnings, though earnings weren’t particularly bad last week, prompting Gluskin Sheff’s David Rosenberg to quip: “How bad can things possibly be when a bellwether like General Electric (GE), which has its tentacles spread to every facet of the economy, not only smashes through its profit targets, but raises its Q4 guidance and a $250 billion order backlog.” Paul Quinsee, head of US equity at JPMorgan Asset Management agrees with that sentiment. “The the numbers we were counting on coming in very strongly have come in strongly,” he said in a phone interview today. “Forward statements have been reasonably good so far too.”

Maybe it just took a little while for that to sink in. Whatever the reason, Deutsche Bank’s David Bianco and team note that markets often bounce back quickly once it becomes clear that the world isn’t going to end:

At 1850-1900, we think the S&P is priced for flat to slightly lower earnings in 2015 (EPS of $115-118). If oil prices stabilize and incoming data suggests no recession, as we expect, confidence should improve in our arguably conservative 2015E EPS of $123. This should make the S&P return to the highs of the year by year end. In the past, when a profit recession was avoided, S&P rallied quickly fully recovering the loss within 2 months.

Then there’s the fact that buybacks have been conspicuously absent as the market cratered thanks to the fact that companies are busy reporting earnings. Goldman Sachs strategist David Kostin thinks a pickup in share repurchases could push the S&P 500 up to 2,50 by year end:

Most companies are precluded from engaging in open-market stock repurchases during the five weeks before releasing earnings. For many firms, the beginning of the blackout period coincided with the S&P 500 peak on September 18. So the sell-off occurred during a time when the single largest source of equity demand was absent. Buybacks dip during earnings reporting months, which have seen 1.2 points higher realized volatility than in other months during the past 25 years. In terms of timing, more than 75% of S&P 500 constituents will have reported 3Q results by the end of October and will then be able to resume buybacks. We expect companies will actively repurchase shares in November and December. Since 2007, an average of 25% of annual buybacks has occurred during the last two months of the year.

Barclays’ Jonathan Glionna and Eric Slover also see buybacks adding to demand:

With prices falling, corporations may emerge as a powerful source of demand. We estimate that S&P 500 companies spent $400bn repurchasing shares in the first nine months of 2014. Another $130bn could be spent in the fourth quarter, by our calculations. To put this in context, the market capitalization of the S&P 500 is $16.5tn. The key consideration is that companies are often in blackout periods during the first few weeks of October as they await the publication of financial results. While many utilize 10b5-1 plans that allow repurchases to continue during blackouts, the ability to opportunistically take advantage of lower prices is impeded. Once results are released, corporations have more flexibility. Of the twenty companies that buy back the most stock, 14 will have reported earnings by the end of October, clearing the way for some of the market’s most consistent buyers to increase their volume.

Glionna and Slover, however, see the S&P 500 closing the year at “only” 1,975. After the recent volatility, I’ll take it.