Stock buybacks have been an important feature of the equity rally.  Companies have used low rates and easy credit to borrow money and used it to buy their own shares back.  An identity for a company’s share price is: S = (revenues * margins * P/E) / # of shares.  Buying back shares reduces the denominator in this equation, thus (all other things equal) boosting the stock price.  But buybacks are waning; the chart below shows a 27% decline in buybacks between 1Q14 and 2Q14.  YoY it is down 1.6%.  (Interestingly, the peak in buybacks was also the peak in the US stock market in 2007.)

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Source: Horan Capital Advisors

Revenues are closely linked to nominal GDP, and our US leading indicator sees this as lacklustre at best going forward.  Margins we have discussed in previous reports.  Our leading indicator for wages has turned up, and this tends to lead to lower profit margins.  Finally, multiple expansion has been a big driver of equity returns in 2012 and 2013, accounting for about 75% of returns.  However, already in 2014 it is slipping, down from 67% in May to under 50% today (chart below).  In short, the pillars of equity performance are crumbling, making it difficult to see how equities can remain supported between now and into early next year.

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Source: Variant Perception and Bloomberg