In 2024, the remarkable surge in U.S. stock prices is anticipated to gain further momentum, driven by an increase in stock buybacks by companies.
Following a slowdown in 2023, stock buybacks are expected to rebound this year, propelled by optimistic forecasts of robust corporate earnings that will leave companies with surplus cash.
Deutsche Bank predicts that the total amount of buybacks could reach a staggering $1 trillion on an annualized basis.
According to data from LSEG, S&P 500 companies are projected to witness a 10% increase in earnings in 2024, following a modest 3% rise in 2023.
READ: Write for Us – Submit Tech and Gadgets Guest Posts
This expected uptick in earnings is anticipated to lead to a minimum 4% rise in buybacks this year, as forecasted by Goldman Sachs, which believes buybacks declined by 15% in 2023.
Ben Snider, an equity strategist at Goldman Sachs, points to several factors contributing to the expected increase in buybacks, including improved earnings growth, declining interest rates from their peak levels, and an overall boost in economic sentiment.
Snider believes that this surge in corporate demand for stock will bolster equity valuations and share prices.
Stock buybacks have several positive effects on stock performance.
By reducing the number of outstanding shares, buybacks make per-share metrics like earnings per share appear more robust, which is commonly used to evaluate equities.
Moreover, increased corporate demand for stock can drive up prices, and repurchasing shares during stock price declines helps mitigate extreme volatility, as highlighted by Goldman’s Snider.
Higher earnings are expected to enable companies to allocate funds for buybacks, even after meeting essential financial obligations such as capital expenditures and debt repayment, as suggested in a report by Deutsche Bank’s strategists.
They contend that if earnings continue to remain strong, buybacks will play a crucial role in driving equities.
The S&P 500 has already surged by over 2% in 2024, hovering near record highs after a 24% rise in the previous year.
Recent announcements from companies like Wells Fargo, Lennar, and Northrop Grumman about their plans for share buybacks in 2024 further emphasize the expected buyback trend.
Grace Lee, a senior portfolio manager at Columbia Threadneedle Investments, underscores the significance of buybacks as a signal to investors regarding a company’s confidence in its stock.
She cites the example of RTX’s announcement of a $10 billion share repurchase, which sent a strong signal to investors and contributed to the stock’s 13% gain in the past three months.
Despite the positive outlook, some investors remain cautious. Jason Pride, Chief of Investment Strategy and Research at Glenmede, raises concerns about the combination of record-high stock prices, elevated valuations, and relatively high interest rates, which could dissuade companies from pursuing buybacks in 2024.
The S&P 500’s forward price-to-earnings ratio, at 20 times, significantly exceeds its long-term average of 15.7 times, according to LSEG Datastream.
In conclusion, 2024 is poised to witness a resurgence in stock buybacks, driven by strong corporate earnings and improved economic conditions.
However, the decision to embark on a buyback spree may be influenced by various factors, including stock prices and interest rates, as companies seek to strike a balance between maximizing shareholder value and managing financial stability.