Investing.com -- When the Fed begins cutting rates, stock buybacks are likely be in vogue and investors should be loading on these stocks as history shows they tend outperform even when the economy turns ugly, or falls into recession.
Regardless of economic context - recession vs. No recession, the companies with a high buyback factor have outperformed during cut cycles since 1990 "with a 100% hit rate," Evercore ISI said in its macro note on Sunday, noting that "when the fed cuts, buy the buybacks."
The Fed is widely expected to deliver the first rate cut next month and continue with rate cuts through 2025.
Stock market forward returns around rate cuts will depend almost entirely on whether the coming of rate cuts is accompanied by a recession, which historically falters when downturns materializes, it added.
Across different rate-cut periods including the July 2019-March 2020, September 2007- December 2008, the September 98 - November 98, and July 1995 to January 1996, stocks with a high buyback factor had a period positive performance relative to factors including dividend, growth, valuation, leverage and others, Evercore ISI added.
Markets face a changing landscape next as the Fed likely continues its cutting cycle compared with the past year when high for longer was the status quo on rates. With this "new lower rate regime lower, the fall in yields isn't likely to carry the unequivocal 'risk on' signal for factor performance that they that they had during the 10 year yield’s decline from 5%."
Still, there are some stocks that have shown to outperform whether a recession occurs or not in the midst of a rate-cutting cycle: stocks with a high buyback factor.
Evercore ISI flagged a "potential outperformers" in the Russell 3000 group of stocks that boast a high factor for buybacks that will also be AI beneficiaries inclding Vertiv Holdings Co (NYSE:VRT) Apple Inc (NASDAQ:AAPL), and Broadcom Inc (NASDAQ:AVGO).