US tax cut leads to share buyback record

American companies are splurging on their own shares. The constituents of the S&P 500 index are expected to spend $650bn buying back their shares this year, which would set a new annual record. The previous high was in 2007 at the top of the global cycle.

The corporate tax cut from 35% to 21% has given year-on-year earnings growth a hefty fillip – to over 20% from underlying profit growth in the mid-single digits.

That has left plenty of spare cash for buybacks to bolster the figures for earnings per share and the stock price. Tech giant Apple, for instance, announced a $100bn buyback programme in early May, a sum that would finance the acquisition of Credit Suisse and UBS, as Sandro Rosa points out in Switzerland’s Finanz und Wirtschaft.

The buyback splurge will provide some support for a market beset by historically high valuations and steadily rising interest rates. But it probably won’t last very long, says Rosa.

Companies are finally beginning to invest again after sitting on their hands for years, so in the next few months spare cash is increasingly likely to go towards expanding production capacity and growing businesses. Both actual and planned investment are on the rise. What’s more, over the past several years American companies have borrowed a great deal of money to finance buybacks, so further impetus from this source is unlikely.