Stocks have continued to trade in a volatile range not far below their all-time highs during the first quarter of 2015.  The real action in stocks is not shown in the averages though, as there has been a dichotomy of winners and losers between and within various stock markets across the globe.  Europe has been the clear winner so far this year as the ‘triple whammy’ of a declining value of the Euro (which boosts export growth), lower oil prices (Europe is a major net importer of energy products) and the massive Quantitative Easing program announced by Mario Draghi in January (buying the equivalent of over US$50 billion of sovereign bonds each month.  The German stock market was the biggest winner, gaining over 22% in the first quarter.   However, the 11% decline in the Euro during the quarter erased a good portion of those gains unless investors hedged the currency.  Chinese stocks have also continued their upward move this year despite a sharp deterioration in their economic growth.  The Shanghai Index gained 15.9% in the first quarter.  This has been another case of ‘bad news is good news’ for financial markets.  When economic numbers weaken, investors become encouraged that central banks will react by dropping interest rates even further, which increases the attractiveness of stocks and other financial assets.  The PBOC did not disappoint on this count as they have given investors what they wanted by promising to loosen monetary conditions even further in the wake of this very weak economic data.

North American markets were more volatile with the major averages finishing the quarter with minimal gains.  However, particularly in the U.S., the domestic stocks did much better than the larger, export-oriented multinationals, which faced the headwinds of a much stronger U.S. dollar and continued weakness in the overseas economies.  While the health care and consumer spending stocks were carried to new highs on rising valuations and lots of takeover activity.  Mega-deals in the health care sector lead corporate activity while the recent Heinz-Kraft merger high-lighted deal flow in consumer products.  On the other side, the strength in the U.S. dollar and lower energy prices lead to numerous earnings downgrades in the industrials, energy and basic materials sectors as stocks were dragged lower.

The S&P/TSX Composite Index in Canada finished the first quarter of 2015 with a gain of 1.85% after falling 2.18% in March.  The heavyweight financial service and energy sectors, which make up over 50% of the total index, were both lower in the quarter, losing 3.0% and 1.6% respectively.  Telecom stocks were also down 4.1% but the other 7 sectors of the index were all higher, with Health Care stocks leading the charge, up 28% on further gains for Valeant Pharmaceutical and the buyout of Catamaran Corporation by United Health Group.  The Info Tech sector was up 7.8% on strength from both CGI Group and Blackberry, while the Gold sub-sector gained 7.2% despite the fact that gold prices were unchanged in the quarter.  U.S. stocks were mixed with the Nasdaq Index ahead by 3.5% on strength in technology and bio-tech, while the Dow Transports were down 4.4% and the Dow Utilities lost 5.0%.  The more broadly-based S&P500 Index was basically unchanged in the first quarter after falling 1.7% in March on a weaker earnings outlook.

So who are the biggest buyers of stocks out there that are keeping the major averages near their all-time highs despite high valuations and slowing earnings growth?  Well it’s not the big institutions or the major hedge funds and it’s certainly not the general public, who continue to avoid stocks in the wake of the 2008 financial crisis.  It’s not sovereign funds, governments or even the ‘easing happy’ central banks.  The biggest buyers of stocks have been the issuing companies themselves!  Stock buybacks, which along with dividends eat up sums of money equal to almost all the S&P500’s earnings, vaulted to another record in February, with $104.3 billion in planned repurchases.  That’s the most since TrimTabs Investment Research began tracking the data in 1995 and almost twice the $55 billion bought a year earlier.  Even with 10-year Treasury yields holding below 2.1 percent, economic growth trailing forecasts and earnings estimates deteriorating, the stock market snapped back last month as companies announced an average of more than $5 billion in buybacks each day.  That’s enough to cover about 2 percent of the value of shares traded on U.S. exchanges, data compiled by Bloomberg show.  Companies that are earning a lot of money and generating cash are borrowing money at basically zero rates and buying back their own stock.  Home Depot Inc., Comcast Corp. and TJX Cos. were among 123 companies that disclosed repurchases in February as five years of profit expansion and record-low interest rates bolstered corporate cash hoardings.

Companies in the S&P 500 have spent more than $2 trillion on their own stock since 2009, underpinning an equity rally in which the index has more than tripled.  They were on pace to spend a sum equal to 95 percent of their earnings on repurchases and dividends in 2014.  Home Depot, the largest U.S. home-improvement retailer, announced last month an $18 billion stock buyback program, including about $4.5 billion in its current fiscal year.  Comcast boosted its repurchases to $10 billion while TJX said it will spend as much as $1.9 billion on its own stock this year.  But these companies are increasing buybacks just as valuations are reaching five-year highs and profits are forecast to post the first back-to-back quarterly contractions since 2009. The S&P 500 trades at 18.9 times earnings, compared with an average of 16.9 since 1936.  Earnings from S&P500 members will decline at least 3.2 percent this quarter and next, according to analysts’ estimates compiled by Bloomberg.  For the full year, profit growth is currently expected to be only 2.3%, down from 5 percent in 2014.  Moreover, the earnings estimates continue to be downgrading, suggesting that growth could actually be even lower than projected.  The chart below from BAML shows the ratio of earnings upgrades to downgrades.  It has been heading lower over the past six months and is now below the long-term average of 0.8.

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