U.S. companies are projected to significantly increase their investment in domestic equities, reaching a high not seen in six years. According to Goldman Sachs, these investments, mainly driven by an uptick in stock buybacks and corporate acquisitions, are expected to total $625 billion as reported by Reuters. This substantial figure is noteworthy as it coincides with the amount that mutual funds and pension houses are estimated to divest from equities, indicating a notable shift in market dynamics.
Goldman Sachs’ Cormac Conners, a U.S. equity strategist, emphasizes the pivotal role of corporate activities in boosting equity demand. Specifically, Conners notes that a marked increase in share buybacks and a consistent rise in cash-based mergers and acquisitions are the primary forces behind this trend. His observations, detailed in a note dated March 21, reflect the growing influence of corporate financial strategies on the equity market.
In a previous report released earlier in March, Goldman Sachs provided a forecast for the S&P 500 companies, anticipating a significant rise in their share repurchase activities. The bank expects these repurchases to grow by 13% to reach $925 billion in 2023, and it even predicts the amount to exceed $1 trillion by the following year, 2024. This expectation highlights the growing trend among large corporations to invest in their own stock, a move that can potentially increase shareholder value.
Despite these bullish forecasts for stock buybacks, Goldman Sachs cautions that the overall impact might be mitigated by concurrent equity issuances. These new issuances, representing additional stock entering the market, could partially counterbalance the effects of stock repurchases. This balancing act suggests a complex interplay between different market forces that could influence the overall direction of the equity market.
A significant factor in the projected market dynamics is the expected behavior of mutual and pension funds. Goldman Sachs estimates that these institutions will sell a substantial amount of stocks, with mutual funds offloading $300 billion and pension funds $325 billion, on a net basis. This divestment reflects a strategic shift in these institutions’ investment portfolios, moving away from equities towards other asset classes.
The anticipated sell-off in mutual funds is attributed to a shift in investor preference from actively managed funds to passive index funds and exchange-traded funds (ETFs). This trend indicates a growing investor inclination towards lower-cost, passive investment strategies. Concurrently, pension funds are expected to reallocate their investments towards safer assets like bonds, suggesting a more risk-averse strategy in the face of market uncertainties.
The upcoming U.S. Presidential elections in November are poised to influence international investment behavior significantly. Goldman Sachs projects that foreign investors will withdraw $50 billion from U.S. stocks in 2023. This forecast is a dramatic reversal from the previous year, when foreign investments in U.S. stocks amounted to $179 billion.
Conners points out that while the U.S. is generally considered a global financial haven, the uncertainties surrounding the Presidential election might lead to increased volatility and a reevaluation of investment strategies by foreign entities.
In contrast to other investor groups, U.S. households are expected to emerge as net purchasers of domestic stocks in 2023, investing about $100 billion. This marks a notable change from their net seller status in 2023. According to Conners, U.S. households have a substantial resource pool in money market assets, totaling $3.8 trillion, which positions them to potentially increase their equity investments. However, he cautions that factors like the continued appeal of credit markets and high equity allocations in portfolios could dampen this potential shift in investment patterns.
22.03.2024
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