(Bloomberg) -- Traders are bracing for US stocks to hit a rough patch as a crucial pillar of support — corporate stock buybacks — are temporarily put on hiatus due to pre-earnings blackouts.

More than 80% of companies in the S&P 500 Index are in share repurchase blackout periods this week, according to Deutsche Bank AG. By comparison the figure was less than just 5% a month ago. The steady demand from buybacks has provided key support for equities in 2024, but that will be gone until early May, when the bulk of Corporate America exit their blackouts.

“Buybacks are a huge support for the stock market since companies increasingly view it as a way to return capital to shareholders,” Yung-Yu Ma, chief investment officer at BMO Wealth Management, said over the phone. “This could add to volatility to equities over the next month since there isn’t a key source of consistent buying from corporates.”

Technicals also indicate a downturn may be coming. While forecasts for earnings growth point to continued strength in the US economy, correlations in the broader market are slipping to multiyear lows. That suggests that the pace of equity gains could cool off.  

For example, the average pairwise correlations for the S&P 500 over the next month sits at just 0.19 — nearly 1 standard deviation below the average since 2000, according to data compiled by Bloomberg Intelligence. Since 2000, the S&P 500 has posted three-month forward returns of 0.04% when correlations are below 0.19, far less than the 2.4% returns when correlations are above 0.19, according to data compiled by Bloomberg Intelligence.

“This suggests that the stock market is a bit too manic,” said Gillian Wolff, equity strategist at BI.

Historically, when investors are bearish, correlations spike because stocks are broadly selling off, Wolff said. But when traders are bullish, equities usually don’t go up all at once. Rather, there’s typically a specific theme that drives a bull run and causes investors to be more selective, similar to the euphoria surrounding artificial intelligence right now. 

This causes some shares to rally and others to fall as investors rotate into industries that they think will benefit most during a bull run, thereby sending correlations lower, Wolff said. 

Meanwhile, three of the most economically sensitive industries in the stock market that recently have broken out to fresh highs appear to be losing steam: semiconductors, homebuilders and transportation companies. Of course, these industries remain in strong uptrends, but traders are watching them closely since their loss of momentum in the third quarter of 2023 led to a brief setback in the S&P 500. 

For now, the best hope for the market may be the buy-the-dip crowd. Brooke May, managing partner at Evans May Wealth, said her firm is searching for opportunities to scoop up stocks on any selloffs, like shares of DR Horton Inc. they purchased on hopes that pent-up demand to buy homes will spur more building in the coming years.

“We fully anticipate a pullback in the stock market of about 5% to 10% in the coming months until it’s imminent that interest-rate cuts are coming,” May said. “It would be very healthy to see a reset.”

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