Stock market outlook: Why equities could be in trouble as buybacks slow

  • Share buybacks — one of the stock market’s strongest growth drivers — fizzled out in the second quarter of 2019 and is projected to decline further though the year and into 2020, Goldman Sachs analysts wrote.
  • Repurchases fell 18% year-over-year in the second quarter, and total buybacks are projected to fall 15% in 2019, according to Goldman.
  • Buyback programs boost share prices and earnings per share by reducing the number of shares outstanding.
  • While spending on buybacks is projected to slow, the analysts anticipate S&P 500 firms will boost dividend payments by 5% in 2020.
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Share repurchases from S&P 500 firms are expected to fall year-over-year and cut off a key growth driver for the stock market, Goldman Sachs analysts wrote.

Total buybacks are projected to fall 15% to $710 billion in 2019, the analysts said, citing repurchase authorization data.

Repurchases fell 18% year-over-year to $161 billion in the second quarter, and the second half of the year will see continued year-over-year decline, they added. The Trump administration’s tax cut fueled record levels of corporate buybacks in the second half of 2018, setting a high bar for the coming quarters to clear.

The healthcare industry contributed to more than half of the year-to-date drop in repurchase spending, Goldman said. The sector’s firms bought $48 billion worth of shares in the first half of 2019 compared to $63 billion in the year-ago period.

Read more: Buybacks have been keeping stocks strong for years — but the gig might soon be up for these 10 companies

Buyback programs boost stock prices and earnings per share by reducing the number of shares in the market. They also symbolize heightened confidence from company leaders, as they expect the shares act as a strong investment and rise over time.

A slowdown in buybacks could signal firms are less inclined to spend in the economic landscape, or that they don’t expect the stock market to maintain its pace of growth. The repurchase decline coincides with weakening global economic growth, continued US-China trade tensions, and looming fears of recession.

Goldman expects the decline to continue through next year, dropping another 5% to $675 billion in 2020. 

S&P stock repurchases “seem to have peaked” since the 2008 financial crisis, Jefferies analyst Sean Darby wrote in an early October note. He said the largest declines stemmed from utilities and healthcare firms, mirroring Goldman’s analysis.

Buyback programs also face new headwinds from political scrutiny. Sens. Elizabeth Warren, Bernie Sanders, and Marco Rubio are among the legislators opposed to share repurchases, and each has pitched plans to halt the practice.

Though the bank expects buyback spending to weaken though 2020, the analysts expect S&P companies to boost dividends by 5% next year. Investors looking for steady yield amidst the buyback slowdown “should consider” discounted dividend stocks, the analysts wrote.

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