Stock buybacks have been juicing the market for some time, but Goldman Sachs says they are on the wane—which is not a good thing for equities.
Companies’ repurchases of stock from investors will be down 15% to $710 billion in 2019, and slide another 5% next year, the investment firm wrote in a note to clients. The consequence, it warned: tepid earnings per share (EPS) and higher volatility.
Coming amid a record-breaking market run, a seeming improvement in US-China trade tensions, and receding fears of an imminent economic downturn, that may seem like an overly downbeat assessment. But in sketching out the reasons for the pullback in buybacks, Goldman outlined larger causes of concern for investors.
“Slow earnings growth, increased leverage, and the lowest CEO business confidence since the global financial crisis contributed” to the buyback drop, it stated.
Since 2011, buybacks have been the single biggest source of US equity demand, averaging $450 billion yearly, the firm said. Thus, for the median S&P 500 company, EPS growth outpaced actual earnings growth by 2.6 percentage point over the past 15 years, it calculated. That’s because buybacks decrease the number of shares outstanding, inflating EPS expansion generally. Plus, fewer buybacks removes a cushion for when the market falls, and companies rush in to repurchase shares in a bid to lighten the damage.
“A significant decline in buybacks would dramatically shift the supply-demand structure for US equities,” the Goldman note read.
The firm also pointed to what happens amid blackout periods, which is the month before the release of quarterly results. Stocks are more often down, and volatility increased during that time, it said.