In any market, whether lettuce or listed stocks, the price is set by the confluence of supply and demand. If supply decreases, due to less lettuce production, and demand remains constant, the price increases. The same goes for stocks.
When analyzing whether stock markets are expensive or cheap and, based on the conclusion, investment decisions are made, some fundamental factors in price developments are usually left aside. These factors include: the liquidity of the system provided by the increase in the balance sheets of central banks; the repurchase of own shares by the companies themselves; and the increasingly relevant weight of passive or index management compared to active management. The first and third factors increase demand for stocks, while the second, corporate stock buybacks, reduce supply.
Since central banks began expanding their balance sheets as part of the solution to the financial crisis, the movement of global stock markets has virtually paralleled the expansion of central bank balance sheets. Above all, In the early years, most of the liquidity injection to stimulate the economy was not aimed at the real economy but at the financial economy.increasing the demand for financial assets and listed shares. Instead of creating inflation in consumer prices, there was inflation in the prices of financial and real estate assets.
Another determining factor, particularly in the development of the American stock market, has been and continues to be the constant repurchase of their own shares by large listed companies (buyouts). As a result of these purchases, the supply of stocks in the US market is decreasing from year to year. In twelve of the last fourteen years, the volume of share repurchases by the companies themselves has exceeded the volume of new shares due to capital increases or IPOs. As a result, the volume of shares available for purchase on the stock exchange (the supply of shares) decreases from year to year. In 2024 alone, share repurchases by listed US companies will exceed the $1.1 trillion. This figure is higher than the value of the 35 companies in the Ibex 35 (737 billion euros).
The companies that repurchase their own shares the most are large companies, especially technology companies, which have a high volume of liquidity. Thus, in 2024, Apple will repurchase shares for an amount of 110 billion dollarsAlphabet (Google) for the amount of 70 billion dollars and Meta (Facebook) is worth 50 billion dollars. The amount of the share buyback of these three large companies in 2024 is equivalent to the purchase of 100% of the shares of Telefónica, Repsol and the six Ibex 35 banks (Santander, BBVA, CaixaBank, Banco Sabadell, Bankinter and Unicaja).
Although the absolute earnings of a company remain the same and do not increase, the smaller the number of shares of a company, the more the earnings 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 to replace active management of stock portfolios with passive or index management.
In the United States, more than 50% of fund and ETF volume is concentrated in passive management vehiclesthat is, they follow the clues. A relevant element is that a transfer takes place from active management to passive management, which has undeniable effects.
When a manager of a fund or ETF referenced to the S&P receives new subscriptions, he is obliged to buy the shares of the companies which make up the index in the same proportion of their weight (very simplified explanation), c ‘that is to sayIt doesn’t matter if you consider these companies expensive or cheap. Your obligation is to follow the index.
The concentration of the main US stock index is increasing. The seven most heavily weighted companies in the S&P represent 30% and the number of their shares is increasingly reduced.
Making forecasts is always complicated and risky. In any case, to try to predict the evolution of the stock markets, in addition to the obligatory 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 transition from active management to passive management vehicles.. In the recent past, they have proven to be essential factors in the evolution of stock markets, particularly American ones.
