A tailwind for US stocks is fading

Stockmarkets can no longer count on the boost from share buybacks.

"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 boughtback 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, isover in the US, buybacks have become "the preferred way to boost stockprices 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.

Recommended

Short squeeze
Glossary

Short squeeze

When a large number of short sellers target the same stock, the price can rise in a self-perpetuating circle known as a 'short squeeze'.
6 Dec 2021
Has the “jam tomorrow” bubble popped already?
Stockmarkets

Has the “jam tomorrow” bubble popped already?

Fund managers have had a good year so far. John Stepek looks at what to expect from markets until year end.
6 Dec 2021
Stockmarkets are trading on thin ice as Omicron variant spreads
Stockmarkets

Stockmarkets are trading on thin ice as Omicron variant spreads

The Omicron variant of Covid-19 is driving stockmarkets down, with travel and leisure stocks particularly badly hit.
3 Dec 2021
Is the bull market over, or is this a short-term pullback?
Stockmarkets

Is the bull market over, or is this a short-term pullback?

Stockmarkets have had a bit of a swoon recently as the Omicron variant spreads around the world. But is this just a market tantrum, asks Dominic Frisb…
2 Dec 2021

Most Popular

Three safe bets on the growing online gambling sector
Share tips

Three safe bets on the growing online gambling sector

Professional investor Aaron Fischer, creator of the Fischer Sports Betting and iGaming ETF, picks three of his favourite online gambling stocks.
29 Nov 2021
Making sense of the new minimum pension age rules
Pensions

Making sense of the new minimum pension age rules

The rules surrounding the minimum age at which you can start tapping into your retirement savings have been tweaked, but are still confusing. David Pr…
23 Nov 2021
Bubbles grow in global property markets as house prices continue to rise
Property

Bubbles grow in global property markets as house prices continue to rise

House prices grew by 6% in the year to mid-2021 in 25 global cities, with the German property market in particular showing signs of overheating.
3 Dec 2021