To The Moon

Both the Fed's rate hike and balance sheet runoff will have a significant impact on the stock market.

To be specific, the rate hike is inclined to affect company valuations, and the balance sheet runoff will have more impact on market liquidity.

On most occasions, the declining market is not caused by the bursting of the bubble, but a decrease in liquidity.

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Let me give you an example.

There were originally 100 buyers and 100 sellers in the market, and the two sides came to equilibrium on the price of $100. Of these 100 buyers, 10 buyers could have financed from banks at very low-interest rates.

But due to the liquidity decrease, these 10 buyers could not get financing at a low-interest rate; and banks refuse to give them more money. So they wouldn't buy stocks temporarily. The market has 90 buyers vs 100 sellers. At the price level of $100, the supply and demand are unbalanced. The remaining 10 sellers have to find buyers at lower prices.

Over the years, in addition to investors in the market, there has been a significant factor that keeps the company's share price firm, and that is --

Stock buybacks

S&P 500 companies, for example, have made buybacks totaling $927 billion in the past 12 months.

It means these companies took out nearly $1 trillion from their own cash flow and put it into the stock market.

Of these companies, $Apple(AAPL)$ ranks first with a total buyback amount of $82.6 billion. The stock buyback of $Google (GOOG)$, $Meta Platforms (FB)$, $Oracle (ORCL)$, $Berkshire (BRK.A)$ $Bank of America (BAC)$, $Microsoft (MSFT)$, $Wells Fargo (WFC)$ and other companies all have made buybacks more than $20 billion.

However, this does not necessarily mean that buybacks will push the company's stock price to a higher level.

$Meta Platforms, Inc.(FB)$ , for example, has seen its share price stumble because of its declining earnings and pessimistic guidance. Against this backdrop, the selling pressure is too strong that company buyback won’t make a difference.

All we can say is that buybacks have a similar effect to dividends, but the benefits are:

• tax avoidance for shareholders
• excellent flexibility 
• potential for higher internal returns

From the company's point of view, buybacks are actually a "transposition" on the balance sheet.

The specific purchase price will determine whether the company's book value decreases. Generally speaking, buybacks at a price higher than book value will result in a decrease in book value, but that's not necessarily a bad thing. By using cash with a much lower return, a higher buyback price will increase the return on equity.

After all, it's obviously not sound financial management for a company to simply add more cash to its books.

At the same time, stock buybacks like Apple do have investment value for the company itself. So Apple is also willing to continue buybacks as its stock price goes up. Companies like Berkshire, on the other hand, are more likely to bottom out when the company's stock price falls to a certain point.

Companies with High Dividends

In addition, companies in the financial, communications, industrial, and energy sectors tend to have higher dividends. (Tech companies generally have lower dividends.) Companies with high dividends in the S&P 500 include $American Telephone & Telegraph (T)$ $ Lumen Technologies (LUMN)$ and others.

Companies with High Dividends and Buyback Amount

 When considering both buybacks and dividends, companies like $Oracle(ORCL)$, $Wells Fargo(WFC)$ and $Lloyds(LOW)$ top the list.  We have compiled a list of companies with a market cap greater than $100 billion in terms of high dividends and buyback value.

Conclusion

As the market is volatile, we need to be more cautious in our selection of investment targets.

What's your opinion on stock buyback?

Are you bullish on these companies?

Share your opinion in the comment section.