U.S. businesses are displaying strong confidence in their future, as evidenced by their robust spending habits.
The first-quarter earnings season has pleasantly surprised many Wall Street analysts. Companies are not only performing well but also actively buying back their own shares, which is bolstering the resurgent stock market.
Data from Birinyi Associates shows that S&P 500 companies reporting first-quarter results as of Monday have repurchased $181.2 billion of their shares, marking a 16% increase from the same period last year. This rapid pace of repurchases has continued for nine consecutive weeks, as highlighted by BofA Securities in a recent research note.
Leading this trend are major tech firms like Meta Platforms, which repurchased $14.5 billion of its shares in the first quarter, a significant increase from the previous year. Other notable companies, including Apple, Netflix, Nvidia, Wells Fargo, Caterpillar, and Altria Group, have also ramped up their buyback programs.
This trend is expected to continue, with Apple recently announcing its plan to repurchase $110 billion of its own stock, driving its shares to their best day since 2022. In total, 443 companies have announced buyback plans this year, compared to 378 last year, according to Birinyi's data.
Investors are interpreting this increase in buybacks as a sign of growing executive confidence, despite ongoing concerns about the economy's strength and uncertainties surrounding interest rates.
The S&P 500 has already gained 8.8% this year, including a 3% rally in May, marking the best start to the month since 2009.
This surge in buybacks follows a sharp decline in 2023 when repurchases by S&P 500 companies fell by 14%. This decline, the second-largest since the 2008 global financial crisis, occurred amidst fears of high interest rates leading to a recession. However, the economy has remained resilient, with earnings growth resuming and expectations of further growth throughout the year.
Analysts at Goldman Sachs project that total S&P 500 repurchases will reach $925 billion this year and $1.075 trillion in 2025, indicating annual growth rates of 13% and 16%, respectively.
Buybacks are favored by investors because they reduce the number of outstanding shares, thereby boosting a company’s earnings per share. However, some caution that buybacks should be part of a broader strategy to enhance shareholder returns and not viewed as the sole reason to invest.
Despite the focus on buybacks, major tech companies are also investing heavily in other areas. Meta and Alphabet, for example, have initiated dividends for the first time this year, in addition to their substantial investments in artificial intelligence.
In conclusion, these spending decisions by companies are seen as reassuring, indicating their confidence in their businesses and future growth.