Investing.com — When the Federal Reserve starts cutting rates, stock buybacks will likely become all the rage and investors should pile into these companies' stocks as history shows they tend to outperform even when the economy turns ugly or falls into recession.
Regardless of the economic backdrop (recession or not), companies with a high buyback factor have outperformed during downsizing cycles since 1990 “with a 100% success rate,” Evercore ISI said in its macroeconomic note on Sunday, noting that “when the Fed cuts, it buys the buybacks.”
The Federal Reserve is widely expected to implement its first rate cut next month and continue cutting rates through 2025.
Future stock market returns around rate cuts will depend almost entirely on whether the arrival of such cuts is accompanied by a recession, which historically falters when downturns materialize, he added.
In different rate cut periods, including July 2019 to March 2020, September 2007 to December 2008, September 1998 to November 1998, and July 1995 to January 1996, stocks with a high repo factor performed positively over the period relative to factors such as dividends, growth, valuation, leverage, and others, Evercore ISI added.
Markets face a changing landscape as the Fed is likely to continue its cutting cycle compared to last year, when rates stayed high for longer. With this “new lower rate regime, falling yields are unlikely to bring with them the unequivocal ‘active risk’ signal to factor performance that they did during the 10-year yield’s fall from 5%.”
Still, there are some stocks that have proven to outperform whether or not a recession occurs in the midst of a rate-cutting cycle: stocks with a high buyback factor.
Evercore ISI pointed to “potential outperformers” in the Russell 3000 group of stocks that have a high buyback factor and will also benefit from ai, including Vertiv Holdings Co (NYSE:), Apple Inc (NASDAQ:) and Broadcom Inc (NASDAQ:).
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