Overseas investors, who own 16 percent of the U.S. corporate equity market, bought $187 billion of shares during the three months through March, making them the biggest buyers of U.S. stocks during the first quarter of the year. Net corporate holdings increased by $129 billion and household purchases, including hedge funds, rose by $7 billion while pension funds and mutual funds sold a net $119 billion and $66 billion, respectively.
The S&P 500 plunged by 34 percent from its Feb. 19 peak before bottoming on March 23 as stay-at-home orders aimed at slowing the spread of COVID-19 caused nonessential businesses to close their doors.
“Foreign investors will continue to be net buyers of U.S. stocks this year and will replace corporations as the largest source of equity demand (+$300 billion),” wrote Goldman Sachs’ Portfolio Strategy Research team led by David Kostin. A weakening U.S. dollar has been the biggest driver of foreign demand over the last 30 years. The firm’s strategists says the greenback could weaken by 20 percent from its recent peak.
Corporate buybacks, fueled in part by President Trump’s tax reform, were the biggest driver of the 11 year-bull market. Increased buybacks led to higher stock prices and earnings per share and reduced the total number of shares outstanding.
Buybacks, which slowed to $730 billion last year after hitting a record $1.1 trillion in 2018, according to S&P Dow Jones Indices, are expected to suffer in the years ahead due to the COVID-19 pandemic, which has strained revenue streams, sent many companies into cash-conservation mode and those firms that took government loans to commit to not buying back shares.
Goldman sees a 33 percent drop in earnings causing share buybacks to fall 50 percent to $370 billion in 2020. One hundred S&P 500 companies, which accounted for 45 percent of 2019 buybacks, have suspended purchases and repurchases are down 49 percent year-to-date, according to the firm.
As companies slow their buybacks, they are ramping up share sales to bolster their balance sheets amid the sharpest economic contraction of the postwar era. U.S. gross domestic product shrunk by an annualized 5 percent rate in the first quarter of the year and is expected to contract by at least 30 percent in the three months through June.
“Equity issuance has skyrocketed $170 billion YTD (vs. an annual $230 billion since 2009),” Kostin wrote, adding that the number will reach $300 billion in 2020, the highest in 20 years.
Goldman sees pension funds and mutual funds being net sellers of $200 billion and $130 billion, respectively, and households being net buyers of $280 billion amid a surge in trading by retail investors and an economic recovery.