(Bloomberg) — As the Federal Reserve signals it plans to delay interest rate cuts, investors are counting on a revival in corporate buybacks to help sustain this year’s stock market rally.
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Strategists at Goldman Sachs Group Inc. expect total share repurchases by American firms to surge 13% to $934 billion in 2024 before crossing $1 trillion next year, backed by robust economic growth. That would mark a rebound from the 13% decline in 2023, when concerns about a potential recession led finance chiefs to preserve cash.
Companies’ executed share repurchases are set for a comeback after higher borrowing costs drove executives to scale back repurchasing their own stock in 2023. That could offer an additional pillar of support for equity markets as investors anticipate the US central bank to delay monetary easing when it announces its next policy decision on Wednesday.
Investors tend to reward companies with strong repurchase programs. Bloomberg’s factors-to-watch analysis shows stock buybacks was the second-best performing strategy in Europe in the past year. In the US, shares exposed to buybacks have room to catch up, with the S&P 500 Buyback Index trailing the 21% rally in the benchmark S&P 500 Index in the past 12 months.
“The surge in buybacks will certainly be a tailwind for stocks this year,” said Mathieu Racheter, head of equity strategy at Julius Baer, adding that the strong economic outlook and limited rate cuts will remain the main drivers for stock markets.
Over in Europe, investors are also counting on buybacks to bolster stock markets. Barclays Plc strategists said repurchase announcements have increased “notably” this year, signaling growing confidence in corporate earnings and stronger balance sheets.
With many focusing on the announcement of new programs, an often overlooked data point is the volume of completed repurchases, according to Jeffrey Rubin, a director at Birinyi Associates Inc. Completed buybacks were up 21% in the first quarter compared with the prior year quarter, Birinyi’s data show. Among the companies that bought back stock in both 2023 and 2024, 60% have increased their repurchases this year.
Buybacks historically have been popular in the US, serving as a nod of confidence to investors by boosting the worth of holdings and reducing share count. Still, repurchases have drawn criticism from both President Joe Biden and former President Donald Trump, who have argued for companies to create new jobs instead. Congress in 2022 voted to impose a 1% tax on buybacks.
Goldman strategists led by David Kostin said the tax — coupled with high interest rates and lofty valuations — will likely weigh on buybacks “on the margin” this year. But more broadly, a rebound in earnings will support an increase in repurchases, they said. High-frequency data from the bank’s buyback desk suggests activity is running 50% above levels seen during the same period in 2023, Kostin wrote in a note.
Returning cash to shareholders has become “a key focus point” for companies in Europe, Barclays said. The influence of buybacks on profits has also grown: the contribution of stock repurchases to European earnings per share now stands at about 2% compared with 1.5% pre-Covid, analysts led by Emmanuel Cau wrote in a recent note.
The jump in buybacks is likely to be a “trigger” for stocks in Europe, with firms expected to keep up the pace seen in the past two years, said Susana Cruz, an equity research analyst at Liberum Capital.
Still, there is skepticism about the rationale for buybacks if a company’s stock is selling at comparatively high multiples, said George Ball, chairman at Sanders Morris Harris. Although buybacks do tend to resume following blackout periods, they won’t have the “strength or durability” they had in the past, he said, pointing to elevated share prices.
–With assistance from Jessica Menton and Thyagaraju Adinarayan.
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