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American companies could start buying up more of their own shares as rising profits generate surplus cash and interest rate cuts come into view.
Stock buybacks struggled to recover last year after taking a hit in 2022, even as corporate earnings began to rebound. Strategists at Deutsche Bank predict that could change soon, but even at their current subdued pace, buybacks should help drive 7% to 8% annual returns in the S&P 500 index.
Investors view buybacks as an indication that a company’s leadership believes its own shares are undervalued and are confident about its future performance. Buybacks also tend to push up share prices due to the added demand.
When the Federal Reserve’s interest rate hikes in 2022 clobbered the stock market and corporate earnings, S&P 500 company buybacks also fell from about $300 billion in the first quarter to $200 billion by the fourth quarter, according to Deutsche Bank.
About three weeks into 2024, some firms have already announced plans to buy back their shares. Home construction firm Lennar on January 9 raised its share buyback by $5 billion. ONEOK, a natural gas company, on Wednesday unveiled a $2 billion share repurchase program.
“The key reason buybacks remain subdued is the continued overhang of cyclical uncertainty with the consensus of economists steadfast in their forecast for a sharp and imminent slowdown,” Deutsche strategists wrote in a research note on January 12. However, “further increases in earnings as in our forecast should prompt increases in buybacks.”
Still, waning but persistent inflation and the Fed’s continued fight to tame it could continue to divert cash away from buybacks to financing more pressing costs.
Big banks, for example, were hit with a one-time charge by the Federal Deposit Insurance Corporation during the most recent quarter related to the collapses of several regional banks last year.
An index that tracks the performance of the top 100 stocks in the S&P 500 with the highest share buyback ratios is down about 2% so far this year. The wider index is up by 0.8%.
“Given the market’s expectations for interest rates to decline even as higher-for-longer interest rates continue, companies may be shy of financing buybacks going forward as discretionary buybacks may need to be financed from ongoing operations,” wrote Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, in a note last month.
Google CEO’s internal memo warns of further layoffs ahead
Google CEO Sundar Pichai warned employees to expect additional layoffs in the months to come as the tech giant reorients itself toward artificial intelligence “and beyond,” reports my colleague Brian Fung.
In a company-wide memo obtained by CNN, Pichai said Wednesday that the job cuts — which have already affected hundreds of Google employees in the past week alone — won’t be on the same scale as the layoffs last year that trimmed Google’s workforce by 12,000 employees.
Some parts of Google’s business will not be hit by this year’s changes, he said. Still, Pichai wrote, “some teams will continue to make specific resource allocation decisions throughout the year where needed, and some roles may be impacted.”
“We have ambitious goals and will be investing in our big priorities this year,” Pichai added. “The reality is that to create the capacity for this investment, we have to make tough choices …. [and] to simplify execution and drive velocity in some areas.”
Jobless claims fall to lowest level since 2022, while CEO exits hit new high
The number of Americans making first-time claims for jobless benefits dropped last week to a level not seen since the fall of 2022, while CEO exits set a new high last year, according to fresh economic data released Thursday.
There were an estimated 187,000 initial claims for unemployment insurance during the week that ended January 13, according to Department of Labor data released Thursday. That’s down by 16,000 claims from the week before and marked the lowest level of first-time claims — considered a proxy for layoffs — since September 24, 2022.
The week’s total for initial claims landed far below economists’ projections for 205,000 initial claims, according to FactSet estimates.
Weekly claims data can be quite volatile and are frequently revised, reports my colleague Alicia Wallace.
Economists caution that some one-off influences — in this case, harsh weather and a new year — could be at play. Still, they also note that despite some broader economic uncertainty, and some C-Suite shakeups, the labor market remains solid.
