Over the past decade, share buybacks have been a major force driving the US stock market rally.

However, with the onset of higher-for-longer interest rates and an uncertain economic backdrop, this trend seems to be experiencing a notable slowdown.

This article delves into the current state of corporate America’s spending on share buybacks, exploring the implications of this slowdown and examining the potential future of this practice.

Current State of Share Buybacks

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According to strategists at Bank of America Corp. (BofA), US stock repurchases are tracking a 3% decline in the third quarter, following a 26% fall in the previous three months. This slowdown marks a significant shift from the previous year, where companies in the S&P 500 spent a record $923 billion on purchasing their own stock. The decline in buybacks is attributed to tightening credit conditions and an increased cost of capital, with BofA strategists highlighting that buybacks remain at risk.

Implications of the Slowdown

The practice of share buybacks has been criticized by politicians and academics, who argue that the funds could be better utilized to foster long-term growth. However, from an investor’s standpoint, buybacks can be appealing as they enhance metrics such as earnings per share by reducing the number of shares in circulation.

Despite this, the S&P 500 Buyback Index has underperformed the broader S&P 500 by about 10 percentage points this year, marking its worst performance since 1998, excluding the pandemic year of 2020.

Challenges and Considerations

A new tax on stock buybacks that came into effect this year adds another layer of complexity for chief executive officers. Tech giants such as Apple Inc., Alphabet Inc., Meta Platforms Inc., and Microsoft Corp. are among the major companies that could be significantly impacted by these levies, with over $110 billion in stock due for repurchase over the remainder of the year. Additionally, the higher-for-longer rates environment has caused companies to rethink their strategy of pursuing buybacks through raising debt, with BofA noting a “muted debt issuance” which suggests that buybacks are likely to remain subdued going forward.

Industry-Specific Trends

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This earnings season has seen major buyback announcements predominantly from sectors known for robust shareholder remuneration, such as energy. Conversely, the banking sector has exhibited more caution, with Citigroup Inc. indicating plans for modest buybacks in the fourth quarter.

Looking ahead, Goldman Sachs strategist David Kostin predicts a potential modest 4% rebound in buyback spending next year, following a projected 15% decline in 2023. This prediction is grounded in expectations of an improved economic climate, the end of the Fed’s rate-hiking cycle, and better earnings growth.

Global Perspective

The trend in Europe has been notably different, with companies traditionally favoring dividends over stock repurchases. However, the post-pandemic era has seen a surge in the popularity of stock purchases. This shift, however, is under threat from cash-strapped governments in Spain and Italy, which have expressed intentions to tax buybacks or have imposed temporary levies on sectors benefiting from high interest rates.

While share buybacks in corporate America are experiencing a slowdown due to a combination of economic uncertainties and changing financial conditions, they still play a significant role in the market. The coming months will be crucial in determining the future trajectory of this practice, with potential implications for investors and companies alike.

Despite the challenges, Goldman Sachs strategists anticipate that corporations will remain the largest buyers of US equities in 2023 and 2024, highlighting the enduring influence of share buybacks in the financial landscape.

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