One unexpected side effect of the Magnificent Seven’s race to build massive AI data centers—and source the power needed to run them—is that they are reducing share buybacks to fund these projects, according to Goldman Sachs.
Companies routinely buy back their own shares to incentivize investors to hold on to them; reducing the number of shares available increases earnings per share and helps boost their own stock prices.
Normally, companies increase their buyback activity by about 20% each year, according to a note written by Goldman’s Ben Snider and colleagues. But in the second half of this year, buybacks across the S&P 500 ground to a halt.
“The Magnificent 7, which account for roughly 30% of S&P 500 gross buyback spending, posted 0% year/year buyback growth during the quarter,” Snider wrote.
“Surging capex spending related to AI will likely prevent a major increase in the buyback payout ratio. The 2Q earnings season reaffirmed the ongoing corporate focus on AI investment spending, which appears to be crowding out buybacks … S&P 500 companies reported 24% year/year capex growth during the quarter but reported -1% growth in gross buybacks,” Snider wrote.
Goldman forecasts that S&P 500 buybacks will begin rising again next year by 12% to $1.2 trillion, but growth will be limited unless AI capital expenditures are scaled back.
