Dow Defies Market Slump But Ticking Time Bomb Could Spoil the Rally

The Dow outperformed the broader U.S. stock market on Monday, as a handful of industrial and technology blue-chips rose sharply on better than expected earnings.

However, Goldman Sachs is the latest Wall Street bank to warn that the current bull market is unsustainable due to the unprecedented surge of stock buybacks since the financial crisis.

Dow Rises; S&P 500, Nasdaq Fall

The Dow Jones Industrial Average was the best-performing index on Monday. As of 2:58 p.m. ET, the DJIA was up 38.64 points, or 0.1%, at 27,231.09. Intel Corp (NASDAQ:INTC) and 3M Co (NYSE:MMM) were the index's top performers.

Dow Jones
Dow Jones Industrial Average advances cautiously on Monday to lead Wall Street higher. | Source: Yahoo Finance.

The broad S&P 500 Index of large-cap stocks declined 0.2% to 3,021.24. Losses were primarily concentrated in communication services and consumer discretionary stocks.

Sliding communication shares weighed on the Nasdaq Composite Index, which fell 0.5% to 8,293.46.

Stock Buybacks Outstrip Cash Flow: Goldman Sachs

stock market warning concept
New research from Goldman Sachs reveals that stock repurchases are outpacing cash flow for the first time since 2008. | Source: Shutterstock

For the first time since 2008, stock buybacks and dividends for S&P 500 companies are outpacing cash flow, offering yet another piece of evidence that the decade-long bull market is unsustainable.

Quoting Goldman Sachs data, MarketWatch reported Monday that in the 12 months ending March 31, S&P 500 companies spent 103.8% of their free cash flow on buybacks and dividends. For the first time since 2006-08, S&P 500 companies spent more cash on payouts than they earned.

“S&P 500 share repurchases have continued to surge in 2019,” Goldman analysts said, as quoted by MarketWatch. “Although S&P 500 repurchase authorizations have declined 20% versus the year-ago period, companies retain capacity to repurchases stock under multiyear authorizations.”

As Hacked.com reported back in May, the S&P 500 Index would be about 19% lower today had it not been for the unprecedented surge in buybacks. Lawmakers on both sides of the political divide have grown weary of repurchases, with some arguing that their sole purpose is to inflate equity values and corporate bonuses.

Goldman analysts forecast that S&P 500 buybacks in 2019 will grow by 13% to $940 billion, a new all-time high. This comes even as non-financial companies in the index reported a 15% decline in their cash levels, the largest since 1980.

Click here for a real-time Dow Jones Industrial Average (DJIA) price chart.

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About the author

Sam Bourgi
Sam Bourgi

Chief Editor to Hacked.com and Contributor to CCN.com, Sam Bourgi has spent the past nine years focused on economics, markets and cryptocurrencies. His work has been featured in and cited by some of the world's leading newscasts, including Barron's, CBOE and Forbes. Avid crypto watchers and those with a libertarian persuasion can follow him on twitter at @hsbourgi. Sam is based in Ontario, Canada and can be contacted at [email protected]

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