“There are a lot of silly theories about what moves the stockmarket,” says Lex in the FT, but one widely discussed factor is definitely bullish: share buybacks. When firms return money to shareholders by buying their own stock, they boost demand for equities. The buyback trend also reduces the supply of shares in the market. Last year, the companies in America’s S&P 500 index bought back almost 3% of the index’s equity.
S&P 500 firms have spent around $2.4trn on buybacks since the market bottom in 2009. A study by S&P estimates that repurchases have been responsible for around 20% of the increase in the market’s value since then. Now that QE, or money printing, is over in the US, buybacks have become “the preferred way to boost stock prices in the face of softening earnings”, says Wallace Witkowski on MarketWatch.com. But the tailwind is fading.
Buybacks rose by 7% year-on-year in the second quarter, but they have gone sideways over the past two years. That could be a problem. After years of rises, shares are no longer good value, while lacklustre earnings growth means there is less cash for companies to deploy. Interest rates look set to climb from the historically low levels that have encouraged borrowing for buybacks.
Most buybacks are now carried out by major companies such as Apple and Oracle – previous “stalwarts”, such as General Electric, Walmart and Coca-Cola, “are backing off”, says Lex. In short, America’s overvalued market is gradually losing another source of support.