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Gluskin Sheff says its assets under management grew 13 per cent despite volatility in global markets.BRENDAN MCDERMID/Reuters

The start of the second quarter earnings season has arrived at the same time as a noticeable pickup in stock market turbulence. Coincidence?

Not according to some sources. A Bloomberg News headline on Wednesday declared: "Calm in stocks ending as earnings season brings volatility." And Reuters blamed Tuesday's declines on the "earnings outlook."

However, the role of earnings is likely being overstated: Yes, companies are starting to roll out their results amid consensus estimates that quarterly profits will climb deeper into record territory, feeding some anxiety that they won't. But a number of other factors, including buybacks, stock valuations and investor complacency, are playing a bigger role in the jitters.

In the case of buybacks, companies have been buying enormous quantities of their own shares, boosting earnings on a per-share basis. Indeed, buybacks have become so popular that companies have become the biggest single category of stock buyers, according to the Wall Street Journal.

Ed Yardeni, president and chief investment strategist at Yardeni Research, put it this way in a note: "The bull market has been driven by investors who have the power to increase the earnings per share of a corporation simply by buying the company's stock. Of course, they are the managers of all those corporations."

Many companies can borrow money at rates that are extremely favourable relative to their corporate earnings yield (or the inverse of the price-to-earnings ratio), giving them an incentive to buy back shares with the borrowed cash.

Mr. Yardeni's numbers are eye-opening. Since the start of the bull market in 2009 through the first quarter of 2014, U.S. buybacks have totalled $1.875-trillion (U.S.) – about double the purchases by households, six times the purchases by mutual funds and more than five times the purchases by institutional investors.

In other words, actual earnings might not mean a whole lot if buyback activity takes a breather. The problem is that the popularity of buybacks is showing signs of doing just that.

According to Mark Hulbert, the founder of Hulbert Financial Digest and a columnist at MarketWatch, new stock buybacks fell to $23.2-billion in June, the lowest amount in 18 months and down from a monthly average of $56-billion in 2013.

True, the monthly numbers can be volatile and, yes, companies could be turning away from buying their own shares and toward buying other companies through a pickup in mergers and acquisitions activity. But as Mr. Hulbert noted, M&A waves also tend to end badly.

Quarterly earnings also look like a sideshow next to the main act, which is high valuations. The bull market has been going for nearly five-and-a-half years, driving the S&P 500 up more than 190 per cent from its bear-market low in 2009.

These heights alone are enough to instill some nervousness. Add in the fact that the S&P 500's price-to-earnings ratio – based on analysts' estimates – is well above the 10-year average, and even bullish observers have something to think about.

Lastly, there is a growing concern about investor complacency as the S&P 500 enjoys one of its smoothest rides in years. The benchmark index hasn't suffered a decline of more than 1 per cent in nearly three months, while the CBOE Volatility index – known as the fear gauge – has fallen toward seven-year lows.

The U.S. Federal Reserve has noticed. In the minutes from its last monetary policy meeting, released on Wednesday, the central bank said it was concerned that investors aren't "factoring in sufficient uncertainty about the path of the economy and monetary policy," according to Ian Shepherdson, chief economist at Pantheon Macroeconomics.

No doubt, quarterly earnings are going to attract attention among observers over the next several weeks as the second quarter earnings season progresses. But the market's direction is going to be affected by a whole lot more.

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