In any market, whether it is for lettuce or listed shares, the price is set by the confluence of demand and supply. If the supply is reduced, due to lower production of lettuce, and the demand remains constant, the price rises. The same goes for stocks.
When analyzing whether the stock markets are expensive or cheap and based on the conclusion, investment decisions are made, some factors that are fundamental in the movement of prices are usually left aside. Among these factors are: liquidity in the system provided by the increase in central bank balance sheets; the repurchase of own shares by the companies themselves; and the increasingly relevant weight of passive or indexed management compared to active management. The first and third factors increase the demand for shares, while the second, share buybacks by companies, reduces the supply.
Since central banks began to increase their balance sheets as part of the solution to the financial crisis, the evolution of the global stock markets has been practically parallel to the increase in the balance sheets of central banks. Above all, In the first years, the injection of liquidity that was intended to boost the economy was, for the most part, not to the real economy but to the financial economy.increasing the demand for financial assets and listed shares. Instead of creating consumer price inflation, there was inflation in the price of financial and real estate assets.
Another determining factor, especially in the evolution of the US stock market, has been and continues to be the constant repurchase of their own shares by large listed companies (buybacks). As a result of these purchases, the supply of shares in the US market decreases year after year. In twelve of the last fourteen years, the volume of share buybacks by the companies themselves has been greater than the volume of new shares due to capital increases or IPOs. As a consequence, the volume of shares available to buy on the stock market (the supply of shares) is reducing year by year. In 2024 alone, the buyback of own shares by listed US companies will exceed the 1.1 trillion dollars. This figure is higher than the value of the 35 companies in the Ibex 35 (737,000 million euros).
The companies most intensive in repurchasing their own shares are large companies, especially technology companies, which have a high volume of cash. Thus, in 2024 Apple will buy back shares for an amount of 110 billion dollarsAlphabet (Google) for the amount of 70 billion dollars and Meta (Facebook) worth 50 billion dollars. The amount of the share repurchase of these three large companies in 2024 is equivalent to buying 100% of the shares of Telefónica, Repsol and the six Ibex 35 banks (Santander, BBVA, CaixaBank, Banco Sabadell, Bankinter and Unicaja).
Although the profit in absolute terms of a company remains the same and does not increase, the smaller the number of shares in a company, the profit per share increases and, therefore, its relative valuation decreases.
In addition to all of the above, we cannot fail to take into consideration the trend in recent years of replacing active management of stock portfolios with passive or indexed management.
In the US, more than 50% of the volume of funds and ETFs is concentrated in passive management vehiclesthat is, they follow the indices. A relevant element is that a transfer is taking place from active management to passive management, which has undoubted effects.
When a manager of a fund or an ETF referenced to the S&P receives new subscriptions, he is obliged to buy the shares of the companies that make up the index in the same proportion of their weight (very simplified explanation), iRegardless of whether you consider these companies to be expensive or cheap. Your obligation is to follow the index.
The concentration of the main US stock market index is increasing. The seven companies with the greatest weight in the S&P represent 30% of it, and the number of their shares is increasingly smaller.
Making forecasts is always complicated and risky. In any case, to try to predict the evolution of the stock markets, in addition to the mandatory fundamental analyses, It is necessary to consider other aspects that influence the supply and demand of shares, such as the liquidity of central banks, the repurchase of own shares and the sustainability of the transfer from active management to passive management vehicles.. In the recent past they have been shown to be essential factors in the evolution of stock markets, especially the American one.
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