They don’t like President Joe Biden. The prosecutor comes after them. And Wall Street strategists warn the boom won’t last. Yet, against all odds, Corporate America continues to topple itself with its own actions, a force that has fueled the New Year’s rally.
In the first month of 2023, announced buybacks tripled to $132 billion from a year ago, hitting the highest total ever to start a year, according to data compiled by Birinyi Associates. The planned buybacks surpassed the previous January record, set two years ago, by more than 15%.
There are signs that corporate demand is accelerating as companies emerge from an earnings-related shutdown. Last week, Morgan Stanley’s desk that executes buybacks for clients saw orders rise 5%, according to the firm’s trading team. That, along with retail buying and demand for rules-based quant funds, supported the S&P 500’s third weekly gain in four.
At a time when recession risks are rising amid Federal Reserve tightening, the buying frenzy can be seen as a ruthless deployment of cash. However, for investors watching companies cut costs on everything from travel to hiring, the continued commitment to buy back shares offers a dose of comfort amid all the doom forecasts.
“It’s encouraging especially given the generally dismal outlook coming out of the C-suites,” said Jeff Rubin, director of research at Birinyi. “But the proof will be in the pudding, as we will be watching very closely whether companies follow through on their announcements and consume the buyback. If they do, the market has that underlying corporate offering.”
Chevron Corp.’s $75 billion buybacks. they marked the biggest announcement of the month, accounting for more than half of the total. However, even excluding the power producer, the amount of buybacks remaining in January stood at $57 billion, a tally that has only been surpassed in three other years.
Like other major oil companies, Chevron faced criticism over its buyback package from the White House, which suggested the money should be directed toward increasing its production rather than rewarding shareholders. To discourage US companies from buying back shares, a law that imposes a 1% tax on buybacks goes into effect this year.
The increase in expected corporate purchases, at least for now, counters the gloomy view that the bulls may lose one of their biggest allies. In a November note from Goldman Sachs Group Inc., strategists led by David Kostin forecast that buybacks would fall 10% in 2023. Should the economy go into recession, the team predicted, buybacks would drop 40 %.
The surprise rebound came during an earnings season that has been relatively lackluster. While it’s likely a sign that business leaders don’t see a better use of cash when the economic outlook remains murky, the fact that they’re sticking to buybacks can be framed as a vote of confidence in their own business In recent downturns, companies have tended to reduce buybacks to preserve cash.
This time, the opposite happened. Last year, as recession fears sent the S&P 500 into a bear market, corporations stepped up their buying with a record $1.26 trillion in planned buybacks.
This corporate willingness to push up its own stocks is one reason why Inigo Fraser Jenkins, co-head of institutional solutions at AllianceBernstein, cautions against leaning too much to the downside in stocks.
“Corporations were already the largest source of demand in the decade before the pandemic, far outpacing investor demand,” he wrote in a report with Alla Harmsworth earlier this year. “The current exceptional pace is unlikely to be sustained as growth slows during this cycle, but we still expect strong buying activity.”
