SocGen’s Albert Edwards says the ‘share buyback party’ that has been driving the stock market is over and he can hear the ‘hissing’ of the stock market bubble starting to burst.
In his latest research note, the well known bear, pointed out that the level of share buy backs fell by 20% in the second quarter, compared to the first three months of the year, and warned of the new threat of a ‘gargantuan’ funding gap emerging.
‘Companies themselves have been the only substantive buyers of equity, but the most recent data suggests that this party is over and as profits also stall out, the equity market is now running on fumes,’ Edwards said.
He said that the companies have been issuing cheap debt to help fuel the share buyback binge, which has seen them reinvest this money in expensive equity.
‘The equity bubble has disguised the mountain of net debt piling up on US corporate balance sheets. This is hitting home now QE has ended. The end of the buyback bonanza may well prove to be decisive for this bubble,’ Edwards said.
'Is that a hissing I can hear?'
Nancy Curtin, chief investment officer at Close Brothers Asset Management, said that the strengthening US economic data will support company earnings and will ‘underpin the long-term outlook for US equities’.
Meanwhile, Raymond James’s chief investment strategist noted that volumes are currently very thin and said that while many indicators suggest US equities are overbought, ‘indicators can stay overbought for a while’.
Of the S&P’s record high Saut said: ‘It would not surprise me to see some weakness now that the milestone has been reached. Still, even if 2,000 doesn't hold, there are few indications at the moment that there is significant trouble ahead. So, for now, party like it's 1999, when we celebrated both 1,300 and 1,400 giving way.’