This Is the Only Thing Propping Up the Stock Market

The only thing propping up the long-in-the-tooth bull market right now is a slew of aggressive share buyback programs. After a volatile year of mediocre earnings, the stock market, while volatile, still remains near record levels. But without legitimate, sustainable earnings growth, the bull market is doomed. Corporate America can only cook their earnings with near-record-high share buybacks for so much longer. Eventually, investors will need to face the fact about the underlying fundamentals of Wall Street.

This Is the Only Thing Holding Up Wall Street

The current bull market recently celebrated its seventh anniversary. Since the markets bottomed in March 2009, the S&P 500 has soared close to 200%, while the Dow Jones Industrial Average is up more than 160%.

Celebrations for the third-longest bull market in history were a muted affair. And for good reason. It’s all smoke and mirrors. Earnings and revenue have been underwhelming for a long time now, yet miraculously, the broader markets, while volatile, still remain near record levels.

In a world without unicorns and leprechauns, investors reward companies that post strong revenue and earnings growth with higher stock prices and punish those that underperform. But this isn’t happening. Or at least it doesn’t appear so on the surface.

Despite abysmal quarterly results, the markets have been surprisingly resilient. The year started off poorly with the S&P 500 losing more than 10% of its value in the first two months of the year on fears of a weakening global economy. Since the middle of February, however, the S&P 500 has bounced back, climbing more than 10%. Why the optimism? Nothing has changed materially.

In addition to blind investor optimism, the stock market is being propped up by corporate buybacks. Buybacks have essentially been responsible for keeping the flat-lining bull market alive for a long time.

According to the most recent data, in the third quarter of 2015, corporate America repurchased $156 billion worth of shares. This represents a quarter-over-quarter increase of 16% and a year-over-year increase of 6.4%. (Source: “Buyback Quarterly,” FactSet, December 15, 2015; http://www.factset.com/websitefiles/PDFs/buyback/buyback_12.15.15.)

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