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Exchange-traded funds are driving demand for stocks as the pace of stock buybacks slow, said analysts at Goldman Sachs.
In a Friday note, analysts led by equity strategist David Kostin noted that ETF demand for equities surged to $98 billion in the first quarter, putting 2017 on pace to exceed total demand in 2015 and 2016 combined. On an annualized basis, the $98 billion in first-quarter demand from ETFs would translate into purchases of $390 billion in 2017, which would top total ETF purchases for 2015 ($174 billion) and 2016 (188 billion) combined.
The Goldman analysts, however, expect the S&P 500 SPX, +0.15% to end the year at 2,300—down nearly 6% from Friday’s close near 2,438. They expect ETF purchases to slow in the second half, making for an annual figure of $300 billion, which would still be a record.
As the chart below from the note shows, ETFs owned 6% of the corporate equity market as of the end of the first quarter, the highest on record:
Mutual funds, meanwhile, are likely to remain net sellers of $50 billion in equities this year, they estimate.
Share buybacks, meanwhile, are expected to continue to grow in 2017 thanks to adjusted growth of earnings a share of around 3%, near-record levels of cash relative to assets, and below-average capacity utilization, Goldman said. They expect U.S. corporate demand (buybacks minus new stock issuance) to rise by 2% to $640 billion in 2017.
That’s substantially cooler, however, than the firm’s previous forecast for 11% growth in demand to $700 billion, which reflects expectations for the delayed passage of the Trump administration’s tax proposals, including measures that had previously prompted Goldman to pencil in the repatriation of $60 billion to $70 billion in overseas profits in the fourth quarter, with around $50 billion expected to be used for buybacks.
The new estimate excludes any boost from tax legislation and accounts for weaker buyback activity in the first quarter, they wrote. Total U.S. corporate demand was $136 billion in the first quarter, lower than each of the last six quarters, but remained the biggest driver of U.S. equity demand.