Stock Market Recovery Faces a New Hurdle as Record Buybacks Slow

An end to corporate America’s record stock-buying spree is giving
equity bulls one more thing to worry about.

JPMorgan Chase & Co., Citigroup Inc., and Best Buy Co Inc. all paused
buyback plans when reporting their second-quarter results, deciding to
hold on to cash instead as the Federal Reserve’s interest-rate hikes
risk driving the economy into a recession. They’re among the 10 that
have halted programs this year for reasons unrelated to M&A — a
“very, very rare” phenomenon, according to Birinyi Associates.

The moves may be an early sign of a pullback from an era of record
stock buybacks that erupted in the wake of the pandemic when
executives tapped cash hoards to purchase almost $1 trillion of their
own shares. While analysts debate how much impact stock buybacks
ultimately have, the retreat threatens to remove one crutch from a
fragile market already contending with inflation and the specter of a
global growth slowdown.

“Buybacks have been the largest source of US equity demand this year
and a big support for stock markets,” said Mathieu Racheter, head of
the equity strategy at Julius Baer. “But buybacks are expected to slow
from here amid a dimmer outlook for earnings and lower CEO
confidence.”

By the end of the first quarter, US firms had spent just over $265
billion on buying back stock, a record amount, according to data from
Barclays Plc. While repurchase announcements have still been strong
year-to-date, some US firms “have used the second-quarter results to
curtail existing buybacks on growth outlook concerns,” strategist
Emmanuel Cau said.

JPMorgan Chief Executive Officer Jamie Dimon said the bank is taking a
hiatus to meet higher capital requirements and allow flexibility for
“a broad range of economic environments,” while reporting earnings
that missed estimates. Citigroup also cited higher capital rules,
saying it’s now in “capital-building mode.”

Other companies are also favoring using cash to bolster their
businesses during a tough economic period.

Retailer Best Buy said it was pausing repurchases as part of its
capital management strategy “in response to the current sales
environment.” The company slashed its guidance and said inflation is
pummeling consumers. And Starbucks Corp. founder Howard Schultz
suspended the coffee chain’s buyback plan in April, saying the cash
could be better spent on stores and staff.

Tax Jitters

The outlook for buybacks next year is even more uncertain, with a
proposed tax on US stock repurchases expected to go into effect.
Democrats are hoping that the 1% excise tax will slow the use of
corporate buybacks because they produce capital gains but no immediate
tax bills.

That may open up a window for companies to pull forward their plans
into the second half of this year. Still, strategists don’t expect
this to provide a big prop to markets, given that overriding
macroeconomic uncertainty will outweigh any positive sentiment from
accelerated repurchases.

“Companies with clear guidance will likely try to front-load some of
the buybacks, though it may not be as market-moving as some expect
given the major macro drivers at the moment,” said Esty Dwek, chief
investment officer at Flowbank SA.

Robert Cantwell, portfolio manager at Upholdings Group LLC in
Nashville, agrees. “We don’t expect a ‘buyback rush’ in the second
half since they are more dependent on share prices than a 1% tax,” he
said. “The tax is more likely to depress share buybacks in favor of
more M&A or internal CAPEX.”

But there’s some good news for those looking for a buyback boost: the
stock market rebound from its June low may also reduce companies’ need
to support their shares through repurchases.

“Equity market prices have been recovering strongly over the last
month and buybacks should absolutely slow down as a result,” Cantwell
said. “Slowing buybacks can be a sign of a strong market, as opposed
to a weak one.”

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