The remarkable rally that catapulted U.S. stocks to all-time highs in recent times is anticipated to receive an additional impetus in 2024, driven by companies repurchasing more of their own shares.
After a brief lull in 2023, stock buybacks are expected to make a robust comeback this year. This surge is fueled by optimistic projections of stronger corporate earnings, leaving companies with a surplus of cash. Deutsche Bank forecasts that the total amount of buybacks could soar to $1 trillion on an annualized basis.
LSEG data indicates that S&P 500 companies are anticipated to witness a 10% increase in earnings for 2024, following a 3% rise in 2023. Correspondingly, Goldman Sachs predicts a minimum 4% rise in buybacks this year, after estimating a 15% decrease in 2023.
Ben Snider, an equity strategist at Goldman Sachs, notes, “The fact that now we have earnings growth that clearly bottomed in 2023, interest rates that have declined from their peaks, and improving economic sentiment all point to an increase in buybacks going forward.”
The potential surge in corporate demand for stock is expected to be beneficial for equity valuations and share prices. Corporate buybacks play a pivotal role in enhancing stock performance by reducing the number of shares outstanding. This, in turn, makes earnings and other per-share metrics used in valuing equities appear more robust.
Goldman’s Snider further highlights that greater corporate demand for stock can drive up prices. Moreover, companies repurchasing shares during stock price declines can act as a buffer against extreme volatility.
Higher earnings are projected to provide companies with the financial capacity to allocate funds for buybacks, even after addressing essential expenses such as capital expenditures and debt repayment, according to Deutsche Bank’s strategists.
The S&P 500 has already witnessed a 2% surge in 2024, standing near record highs after a remarkable 24% rise in the preceding year.
Recent announcements from companies like Wells Fargo, Lennar, and Northrop Grumman signal an increasing trend in stock buybacks. Wells Fargo has expressed intentions to repurchase more shares in 2024 than the previous year, while Lennar increased its share buyback plan by up to $5 billion. Defense contractor Northrop Grumman plans at least $2 billion in repurchases in 2024.
Grace Lee, senior portfolio manager at Columbia Threadneedle Investments, emphasizes the signaling aspect of buybacks to investors. She points out that when defense and aerospace company RTX announced a $10 billion share repurchase despite facing challenges with its aerospace engines, it sent a strong signal that bolstered investor confidence, resulting in a 13% increase in RTX shares over the past three months.
While buybacks are a significant factor, investors also consider various other elements in assessing stock trajectories. Factors such as cooling inflation, resilient growth, and expectations of the Federal Reserve lowering interest rates contribute to the overall market sentiment.
However, some investors remain cautious. Jason Pride, Chief of Investment Strategy and Research at Glenmede, notes that record high stock prices, elevated valuations, and relatively high interest rates might make companies reconsider buybacks in 2024 compared to the previous year.
With the S&P 500 trading at a forward price-to-earnings ratio of 20 times, well above its long-term average, the landscape presents challenges. “The financing logic would tell you that 2024 is a year in which you are less incentivized to do buybacks than 2023, because of higher stock prices and higher interest rate costs,” Pride said.
