Reuters / Lucas Jackson
- Companies are repurchasing fewer shares of their stock, and if the trend escalates it could threaten their share prices and earnings per share and fuel volatility, says Goldman Sachs.
- The banking titan expects stock buybacks among S&P 500 companies to drop 15% to $710 billion this year, then fall another 5% to $675 billion in 2020.
- "A significant decline in buybacks would dramatically shift the supply-demand structure for US equities," Goldman said.
- "The large decline in share repurchases would likely lead to slower EPS growth and wider trading ranges with higher volatility."
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Companies are repurchasing less of their stock, and if the trend escalates it could threaten their share prices and earnings per share and fuel volatility, according to Goldman Sachs.
The banking titan expects stock buybacks among S&P 500 companies to drop 15% to $710 billion this year, then fall another 5% to $675 billion in 2020, chief US equity strategist David Kostin and his team said in a note on Friday. The reduction is concerning because share repurchases have been the biggest source of demand for US equities every year since 2011, averaging $450 billion annually, they wrote.
"A significant decline in buybacks would dramatically shift the supply-demand structure for US equities," Goldman said. "The large decline in share repurchases would likely lead to slower EPS growth and wider trading ranges with higher volatility."
Despite the potential headwind, Goldman forecasts solid EPS growth of 6%, while less political uncertainty will push the S&P 500 up 7% next year.
The importance of buybacks
Companies buy back shares to show their confidence and reduce their share count, which boosts their earnings per share. The practice has contributed to the median S&P 500 company reporting EPS growth of 11% versus earnings growth of 8% over the past 15 years, Goldman said. Fewer buybacks could lessen support for equity prices and raise price volatility, it added.
Apple is one example of a company that has cut its stock repurchases. It spent about $67 billion buying back shares in the year to September, an 8% drop from the roughly $73 billion it splurged in the preceding 12 months.
The significance of buybacks was underlined this week when Berkshire Hathaway shareholder and money-manager Bill Smead suggested Warren Buffett might be hoarding $128 billion in cash to fund share buybacks if he falls ill and wants to reassure investors.
