Corporate share buybacks are at a record high but capex and tax demands may slow the pace, says BofA

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  • A four-week average of share buybacks hit a record of nearly $2 billion, according to research from Bank of America.
  • Wall Street may be on track for $900 billion of gross S&P 500 buybacks in 2021.
  • But buybacks may slow down if companies put more cash into capital expenditures.
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Share repurchases by corporations reached record highs in March, but buybacks may slow if companies decide to swing their cash into capital expenditures or if they adhere to tax regulations stemming from the government’s stimulus efforts, said Bank of America.

The four-week average of repurchases by corporate clients hit record highs “after a big resurgence in buybacks this month” that put transactions at nearly $2 billion, said a team of equity and quant strategists led by Jill Carey Hall in a research note released Wednesday.

If corporate client buybacks continue at the pace of $21 billion year-to-date or more than $80 billion annualized, that would imply more than $900 billion of gross S&P 500 buybacks in 2021, the strategists said. It said it based that figure on a roughly 9% average share of S&P buybacks over the last five years.

“This would be above 2018’s peak $800 billion levels and nearly double 2020’s depressed $500 billion levels, suggesting upside risk to our forecast for no net EPS impact from buybacks to the S&P,” BofA said.

Recent repurchases have been prominent in the tech sector, with near-record buybacks in each of the last six weeks.

However, the strong pace of overall stock repurchases “may not persist if cash deployment priorities shift more toward capex, which investors want and where corporates have underinvested,” said BofA. It referenced its Fund Managers Survey issued March 16 that showed “investors now want capex” and not buybacks or debt reduction.

“We see multiple tailwinds for capex including the cyclical rebound, a potential infrastructure bill and US re-shoring,” or relocations by companies back in the US, Carey Hall said.

President Joe Biden is set later Wednesday to unveil a $2 trillion infrastructure bill that’s expected to focus on investments including in roads, bridges, and broadband.

“What else can curtail buybacks? Payback for stimulus (i.e., higher taxes) which could cost 5-10% EPS growth,” said BofA.

Biden is expected to propose that his eight-year infrastructure plan be paid for with tax hikes on corporations. Earlier this month, Biden signed off on a $1.9 trillion fiscal stimulus package.

BofA said single-stock corporate buybacks in tech last week hit roughly $1.61 billion. March was a relatively rough month for large-cap tech shares as investors rotated from the high-flying group and into small-cap and cyclical shares. The rotation has been stoked in part by the vaccination of millions of Americans that’s been leading more businesses to resume normal operations.

BofA said it’s starting to see a pickup in buybacks in other sectors including consumer discretionary, health care and financials. The Federal Reserve said last week that as of June 30 it will lift share buyback and dividend-payout restrictions on banks that pass stress tests. The Fed last year imposed the restrictions as a way to safeguard the financial system in the face of the COVID-19 pandemic.

Last week, corporate buybacks reached $143 million for consumer discretionary stocks and $119 million in health care shares, BofA data shows.

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US households will push $350 billion into stocks this year as faster economic growth lifts demand, Goldman says

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A man sits on the Wall street bull near the New York Stock Exchange (NYSE) on November 24, 2020 in New York City.

  • Goldman Sachs lifted its forecast for 2021 US household equity demand to $350 billion from $100 billion.
  • The new level accounts for stronger economic growth and sets households up to be the largest source of stock market demand this year.
  • Corporations are set to buy $300 billion in stock as repurchase activity rebounds, the bank added.
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US households’ demand for stocks is set to rebound alongside the broad economy and even exceed corporate buying in 2021, Goldman Sachs strategists said.

Equities continue to endure volatile price swings as rising Treasury yields cut into their appeal. Pricey tech stocks and growth names have plummeted as investors shift cash to sectors most likely to benefit from a full reopening. 

The choppy price action isn’t likely to keep Americans from the market, Goldman said in a note to clients. The bank lifted its estimate for 2021 household equity demand to $350 billion from $100 billion. The new projection sets households up to be the largest source of stock-market demand this year.

The updated forecast reflects “faster economic growth and higher interest rates than we had assumed previously, additional stimulus payments to individuals, and increased retail activity in early 2021,” the team led by David Kostin said Friday. Accelerating economic growth has been the single most important driver of households’ equity purchases over the past three decades, the team added.

Corporate equity demand will also bounce back from 2020 levels. Roughly $126 billion in stock buybacks have been approved year-to-date, up 50% from levels seen at the same time last year, Goldman said. Surging profits and elevated cash balances should also prop up repurchase activity. The bank sees corporations buying $300 billion in stock through the year, up 100% from last year’s levels but 25% below the annual average seen from 2010 to 2019.

Precedent suggests the market’s wild moves precede healthy gains, the bank said. Periods of rising real rates and breakeven inflation have been the most favorable for stocks over the past 10 years. Investors’ equity allocations usually grow when interest rates tick higher, the strategists added.

To be sure, Goldman’s Sentiment Indicator currently sits two standard deviations above average, implying “extremely stretched” positioning in stocks. Such crowding will serve as a headwind to market gains, the team said. But accelerating growth should still drive the S&P 500 higher over the next two months at least, they added.

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