The beginning of 2024 witnessed a tepid start for stocks, prompting investors to turn their attention to share buybacks as a potential catalyst to maintain the momentum of last year’s rally. The upcoming earnings season, during which companies unveil their share repurchase plans, is eagerly awaited by investors seeking to bolster the market. However, caution prevails among hedge funds and retail investors, with concerns about the Federal Reserve’s potential rate cuts adding to the overall sense of uncertainty.
Brian Reynolds, Chief Market Strategist at Reynolds Strategy, expressed a bullish outlook for stocks in 2024 despite institutional bearishness. Anticipating a challenging journey in the coming months, he emphasized that companies are likely to initiate share buybacks once the selling pressure subsides, aiming to uplift stock values.
The backdrop of limited share repurchases by US corporations stemmed from the Federal Reserve’s efforts to combat inflation by raising interest rates, resulting in increased borrowing costs. Buybacks experienced a decline for five consecutive quarters after reaching a record high in 2022, as indicated by Bloomberg Intelligence. With the prospect of the Fed considering rate cuts and an improvement in earnings growth forecasts, investors foresee companies deploying their available capital in stock repurchases.
While the fate of the stock market is not solely dependent on buybacks, their substantial volume—nearly a trillion dollars annually—represents one of the most significant buying forces. S&P 500 companies spent close to $800 billion on buybacks in the past year, reflecting a nearly 20% decline from the previous year, according to Bloomberg data.
Preliminary data from S&P Dow Jones Indices suggests that S&P 500 firms are expected to allocate at least $840 billion toward buybacks in 2024. The 12-month expenditure until September 2023 amounted to $787 billion, marking a nearly 20% decrease from the preceding year. The highest recorded expenditure was $923 billion in 2022.
Despite an 18% decline in total corporate buybacks in the third quarter, more than 40 S&P 500 companies announced buybacks in the fourth quarter, totaling $163 billion. Notable among them are Cigna Group and Adobe Inc., both equipped with available cash following aborted corporate takeovers.
However, the challenge lies in market timing—deciding when to initiate buybacks and predicting when share prices will rise. The Federal Reserve’s timeline for rate cuts becomes a crucial factor in this decision-making process. Some experts suggest that companies might postpone borrowing for repurchases until later in 2024 or early 2025, aligning with the potential delay in the Fed’s rate cuts.
Despite the challenges, buybacks seem poised for a resurgence. Capital spending as a percentage of sales has rebounded to the pre-pandemic five-year average, driven in part by increased allocations from tech giants like Apple Inc. Companies like Broadridge Financial Solutions Inc. are actively engaging in buybacks, with plans to spend approximately $500 million during the current fiscal year.
Nancy Tengler, CEO at Laffer Tengler Investments Inc., emphasizes the significance of buybacks for companies facing slowing profit growth, stating that they serve as a strategic solution to support stock value during downturns.
As market participants await further developments in the dynamic landscape, the role of share buybacks emerges as a key factor in navigating the evolving trajectory of the US stock market.
