Stock buybacks are soaring, a sign that U.S. companies are optimistic about the U.S. economy.
Companies announced more than $383 billion in share repurchases over the past 13 weeks, up 30% from a year earlier and the largest amount since June 2018, according to a study by the Deutsche Bank. Total includes Apple’s A $110 billion planthe biggest takeover in history.
Deutsche Bank’s equity strategy team notes that the buyback “boom” extends beyond big names like Apple (AAPL) and the alphabet (GOOG, GOOGLE), which has just announced a $70 billion buyback plan. Of the $262 billion in buybacks announced during the first quarter earnings season, $82 billion came from companies outside of the big tech giants.
It’s a welcome sign for those looking for a widening stock market rally.
“Share buybacks have been the main driver for stocks in the medium term,” Binky Chadha, Deutsche Bank’s chief equity strategist, told Yahoo Finance before the start of first-quarter earnings reports.
For Chadha, the importance of buybacks is simple: They tell investors how companies feel about the macro environment.
Buybacks generally increase when profits rise, Chadha said. Indeed, as income increases, which is currently proceeding at its fastest pace in almost two years, business cash flow increases. Companies can then use these cash flows to increase dividends paid to shareholders, increase capital expenditures to reinvest in the business or repurchase shares and, in turn, return capital to shareholders.
This trend has not materialized in 2023. Profits have recovered, but buybacks have not. Chadha thought it probably had to do with the overwhelming majority predict that a recession will hit the U.S. economy.
“When the macroeconomic consensus is for a severe slowdown or recession, companies will not engage in buybacks,” Chadha said. “They’re going to keep their money.”
But this macroeconomic consensus has changed. Economists and macrostrategists feel more optimistic about U.S. economic growth This year. Companies confirm this confidence with buybacks.
“What you saw in the fourth quarter results earlier this year was that buybacks really started to pick up,” Chadha said. “So I would say this cloud of cyclical excess is fading. Companies are becoming more comfortable with the outlook.”
Elyse Ausenbaugh, global investment strategist at JPMorgan Private Bank, noted that the rise in buybacks provides a “good foundation for investors” as companies buying back their shares help support the market, even as individual investors do not. don’t invest money in stocks.
And going further, Ausenbaugh sees buybacks as just part of the argument made in the first quarter results that companies are seeing higher cash flow and using it in a way that should eventually benefit shareholders. such as increased capital spending for big tech companies.
(Increased investments will) continue to fuel these trends that have brought a lot of support to the market, like AI,” Ausenbaugh told Yahoo Finance.
Josh Schafer is a reporter for Yahoo Finance. Follow him on @_joshschafer.
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